3S3S3^ 

LIBRIS 


MODERN  BUSINESS 
CORPOBATIONS 


THE  ORGANIZATION  and  MANAGEMENT  OF 
PRIVATE  CORPORATIONS 


FINANCIAL  PRINCIPLES  and  PRACTICES 


AND  SUMMARIES  OF    DECISIONS  OF  THE    COURTS  ELUCIDATING  THE  LAW  OF 

PRIVATE  BUSINESS  CORPORATIONS,  AND  EXPLANATIONS  OF  THE 

ACTS  OF  PROMOTERS,  DIRECTORS,  OFFICERS  AND 

STOCKHOLDERS  OF  CORPORATIONS 


BY  WILLIAM  ALLEN  WOOD,  M.  8.,  LL.  B. 

Of  the  Indianapolis  Bar 


FORMS  OF  PROCEDURE  ILLUSTRATIVE    OF  THE  FORMATION,  ORGANIZATION-, 
OPERATION  AND  CONSOLIDATION  OF  CORPORATIONS 

Written  or  selected 

BY  LOUIS  B.  EWBANK,  LL.  B. 

Of  the  Indianapolis  Bar 


OF  THE 

(   UNIVERSITY  J 

INDIANAPOLIS 

THE  BOBBS-MERRILL  COMPANY 
PUBLISHERS 


COPYRIGHT  1906 
BY  THE  BOBBS-MERRILL  COMPANY 


THE   HOLLENBECK   PRESS 
INDIANAPOLIS 


PKEFACE. 


The  object  in  preparing  this  book  has  been  to  combine  the 
essentials  of  the  substantive  law  of  corporations  with  the  proce- 
dure in  the  organization  and  management  of  corporations  so 
that  the  officer,  director  or  stockholder  of  corporations,  and  also 
the  lawyer  for  corporations,  may  have  a  ready  reference  manual 
by  which  to  gauge  his  actions.  Much  of  the  litigation  in  corpo- 
ration lines  arises  out  of  the  ignorance  or  ignoring  on  the  part 
of  these  persons  of  the  essentials  herein  contained ;  also  many  of 
the  failures  of  corporations  arise  from  deflections  from  the 
principles  of  management  and  finance  which  are  here  intro- 
duced. The  yearly  economic  waste  from  these  sources  is  enor- 
mous. The  principles  of  capitalization  and  finance  have  been  ' 
given  lengthy  treatment  because  lawyers  are  rarely  ever  familiar 
with  them  and  because  these  principles  are  not  contained  in  any 
other  book  on  this  subject.  The  corporation  lawyer  of  to-day 
should  understand  particularly  well  the  principles  of  capitaliza- 
tion since,  in  most  of  the  instances  where  he  is  called  upon  to 
incorporate  companies,  his  advice  is  asked  on  this  matter.  It 
should  be  remembered  that  honesty  and  conformity  to  law  in 
the  organization  and  administration  of  corporations  is  the  best 
policy  even  from  the  most  selfish  standpoint.  The  spirit  of  the 
following  extract  from  the  last  report  of  the  National  Biscuit 
Company  is  commended  to  the  officers  and  directors  of  corpora- 
tions. After  explaining  that  corporations  are  inevitable  and  de- 
sirable, and  that  our  whole  commercial  character  depends  on 
the  management  of  them,  the  writer  of  the  report  says :  "Erery 
officer  of  a  corporation  should  endeavor  so  to  manage  its  affairs 
that  it  shall  commend  itself  to  the  people  of  the  country  so  that 
the  attitude  of  the  people  towards  corporations  shall  be  not  hos- 
tile, but  friendly.  To  accomplish  this,  the  vital  point,  it  seems 

iii 


17  PREFACE. 

to  us,  is  that  the  corporation  must  not  be  separated  from  the 
individuals  who  manage  its  affairs,  and  that  these  individuals 
must  carry  into  the  management  of  the  corporations  the  same 
rules  of  conduct  that  they  apply  to  their  private  lives.  They 
must  not  have  one  standard  of  morality  as  officers  and  another 
as  private  individuals.  They  must  not  only  obey  the  law,  but 
they  must  actively  support  the  law." 

Neither  lawyers  nor  laymen  having  to  do  with  corporations 
can  have  too  extensive  a  knowledge  of  the  well-established  prin- 
ciples of  corporation  law.  It  would  be  impossible  in  a  book  this 
size  to  include  the  exceptions  declared  by  positive  rules  of  law 
in  matters  of  detail ;  but  a  book  of  this  kind  furnishes  a  basis 
for  all  later  and  more  extensive  knowledge,  and  suggestions  of 
caution  are  liberally  sprinkled  in  places  where  they  are  most 
needed.  The  authorities  used  in  the  preparation  of  this  book 
are  many;  but  principally  the  following  works  have  been  con- 
sulted :  Seymour  D.  Thompson  on  Corporations,  Elliott  on  Pri- 
vate Corporations,  Dill  on  New  Jersey  Corporations,  Conyngton 
on  Corporate  Management  and  Meade  on  Trust  Finance. 

It  has  been  the  plan,  as  far  as  possible,  to  arrange  the  divisions 
of  the  subject  as  to  their  time  sequence  in  the  formation,  organ- 
ization and  management  of  corporations,  and  to  keep  from  chop- 
ping the  subject  into  such  small  bits  by  sectional  arrangements 
that  its  organic  conception  is 'destroyed.  A  book  of  this  kind  is 
necessarily  an  interweaving  of  law  and  business  economics,  as 
corporate  business  purposes  are  forwarded  only  through  the  union 
of  corporate  powers  and  corporate  funds  or  assets. 

WILLIAM  ALLEN  WOOD. 


INTRODUCTORY. 


Sohm,  in  The  Institutes  of  Eoman  Law,  says:  "The  concep- 
tion of  a  collective  juristic  person  as  a  possible  subject  of  private 
rights  was  not  developed  till  towards  the  close  of  the  republic 
with  the  rise  of  the  system  of  municipal  government.  The  prop- 
erty of  the  municipium  or  town-community  was  brought  under 
the  private  law,  and  the  municipium  thus  acknowledged  as  a 
person  capable  of  private  rights  and  duties.  *  *  *  [The 
juristic  person  of  Eoman  law]  represents  a  kind  of  ideal  private 
person,  an  independent  subject  capable  of  holding  property, 
totally  distinct  from  all  previously  existing  persons,  including 
its  own  members.  It  possesses,  as  such,  rights  and  liabilities  of 
its  own.  *  *  *  In  point  of  law,  the  collective  person  is  a 
new  individual  like  other  individuals.  *  *  *  Koman  law 
contrived  to  accomplish  a  veritable  masterpiece  of  juristic  in- 
genuity in  discovering  the  notion  of  a  collective  person;  in 
clearly  grasping  and  distinguishing  from  its  members  the  col- 
lective whole  as  the  ideal  unity  of  the  members  bound  together 
by  the  corporate  constitution;  in  raising  the  whole  to  the  rank 
of  a  person  (a  juristic  person,  namely),  and  in  securing  it  a 
place  in  private  law  as  an  independent  subject  of  proprietary 
capacity  standing  on  the  same  footing  as  other  private  persons. 
*  *  *  A  natural  person,  then,  is  a  visible  individual  person, 
a  human  being ;  a  juristic  person,  within  the  meaning  of  private 
law,  is  an  ideal  individual  person  with  proprietary  capacity,  cre- 
ated by  means  of  organization."  So  much  for  the  origin  of  the 
corporations.* 

In  the  time  of  the  republic  of  Kom£  voluntary  corporations 
were  formed  so  extensively  and  so  without  restriction  that  they 
were  all  dissolved  by  a  law  passed  64  B.  C.  Later  they  were  re- 
vived, and  under  Julius  Caesar  it  was  required  that  the  objects 
of  incorporation  should  be  clearly  denned  in  the  charter  (ar- 

*  Gaius  traces  corporate  bodies  to  the  time  of  Solon  of  Athens. 

v 


VI  INTRODUCTORY. 

tides),  and  that  every  charter  should  be  submitted  to  Caesar 
for  approval.  After  the  fall  of  Rome,  and  during  the  Middle 
Ages,  the  business  corporations  did  not  cut  much  figure.  Church 
and  workmen's  guild  corporations  flourished.  Later  great  trad- 
ing corporations,  such  as  the  East  Indian  Company,  the  Hud- 
son Bay  Company,  and  many  similar  corporations  were  organ- 
ized in  England  and  other  European  countries.  The  English 
companies  got  to  be  monopolistic,  and,  in  the  end  of  Elizabeth's 
reign,  two  hundred  shareholders  controlled  five-sixths  of  the* 
foreign  trade  of  England.  These  companies  were  created  by' 
special  charter.  England  now  has  general  incorporation  laws. 
In  colonial  times  in  America  corporations  were  formed  through 
grant  of  charter  by  the  crown  or  by  the  governors  as  representa- 
tives of  the  crown.  From  time  to  time  the  separate  colonies  be- 
came independent  states.  Up  to  1837  charters  were  granted  only 
through  special  acts  of  the  legislatures.  In  1837  a  business  cor- 
poration act,  drawn  by  Theodore  Hinsdale,  a  graduate  of  Yale, 
was  passed  by  the  Connecticut  legislature.  This  was  the  first  act 
of  the  kind  in  America,  and  it  was  the  model  for  the  general 
enabling  acts  for  business  corporations  passed  by  the  other  states 
for  several  years  after.  The  working  of  this  kind  of  legislation 
was  so  satisfactory  that  the  creation  of  corporations  by  special 
acts  has  been  forbidden  by  the  constitutions  in  many  of  the 
states  of  the  Union.  Later  years  and  wider  experience  have  de- 
veloped a  more  liberal  kind  of  code,  which  follows  the  modern 
theory  that,  in  the  absence  of  fraud  in  organization  and  manage- 
ment, a  business  corporation  should  be  allowed  to  do  anything 
that  an  individual  may  do.  A  model  code,  called  The  Business 
Companies'  Act,  was  formed  on  this  idea,  and  was  drawn  up  un- 
der the  direction  of  the  eminent  corporation  counsel,  Mr.  James 
B.  Dill,  of  New  York,  and  the  eminent  economist,  Professor 
Jeremiah  W.  Jenks,  of  Cornell  University,  and  was  recom- 
mended in  1900  to  the  New  York  legislature  by  Governor 
Roosevelt.  It  is  worthy  the  study  of  all  who  are  interested  in  the 
reform  of  this  important  branch  of  the  law.  The  Industrial 
Commission,  also,  has  made  some  important  recommendations  as 
to  reforms  in  corporation  law. 


TABLE  OF  CONTENTS. 


PART  I. 

PRIVATE  CORPORATIONS  :    DEFINITION,    ADVANTAGES,    LEGAL 
STATUS,  ETC. 

SECTION.  PAGE. 

1.  Corporation:    Definition 1 

2.  Kinds  of  Private  Corporations 2 

3.  By  What  Laws  a  Private  Corporation  is  Governed 2 

4.  Incorporation  in  More  Than  One  State 3 

5.  Special  Acts  of  Incorporation 4 

6.  Difference  Between  a  Private  Corporation  and  a  Joint  Stock 

Company   4 

7.  Advantages  of  Incorporation , 5 

8.  Two  Theories  of  the  Duty  of  a  State  in  Creating  a  Corpora- 

tion  .                                                   7 


PART  H. 

THE  FORMATION  AND  ORGANIZATION  OF  A  PRIVATE  CORPORA- 
TION. 

SECTION.  PAGE. 

9.    Who  May  Form  a  Private  Corporation 14 

10.  Fortuitous  Association  of  Individuals 14 

11.  Definition  of  Promoter,  and  the  Promoter's  Functions 15 

12.  Promoters'  Profits 16 

vii 


Till  CONTENTS. 

SECTION.  PAGE. 

13.  Fiduciary  Relation  of  Promoter  to  Prospective  Corporation  17 

14.  Responsibility   of    Fiduciary    Relation    and    Recovery    for 

Breach    17 

15.  Promoter's    Fraudulent    Representations    or    Concealment, 

and  Liability  Therefor 18 

16.  Failure  of  Organization  of  the  Corporation  and  Promoter's 

Liability    19 

17.  Corporation's  Liability  for  Services  Rendered  by  Promoter  19 

18.  Promoter's  Lack  of  Agency 20 

19.  Contracts  Made  with  Promoter 21 

20.  Inter-relation  of  Promoters 21 

21.  Aiders  and  Abettors  of  a  Fraudulent  Promoter 22 

22.  Where  to  Incorporate 22 

23.  Special  Advantages  and  Disadvantages  in  the  Corporation 

Laws  of  the  Liberal  Commonwealths 23 

24.  Relation  to  the  Creating  State  of  a  Corporation  Whose  Prin- 

cipal Office  and  Business  are  Located  in  a  Foreign  State.  27 

25.  A  Corporation's  Relation  to  Foreign  States 28 

26.  Capitalization:    Definition ,.  31 

27.  Determining  the  Amount  of  Capitalization 32 

28.  More  Things  in  Regard  to  Stocks  and  Bonds  to  be  Consid- 

ered Before  Capitalizing 39 

29.  Capitalizing  at  Less  Than  Real  Value 44 

30.  Placing  Stocks  and  Bonds 45 

30a.  Financial  Banking  and  Trust  Organization 50 

31.  The  Stock  Exchange 59 

32.  The  Sale  Price  of  Stocks  and  Bonds  With  Reference  to 

Time  of  Issue 62 

33.  Changing  a  One-Man  Business  or  Partnership  Into  a  Cor- 

poration      65 

3,4.    Proper  Valuation  of  Private  Business  or  Partnership  As- 
sets, Patents,  and  Other  Property  to  Safely  Constitute 

Stock  Exchanged  for  Them  Full-Paid 68 

35.    Stock  Subscriptions 69 


PART  III. 

CHARTER,  ARTICLES,  BY-LAWS  AND  KULES  OF  ORDER. 

SECTION.  PAGE. 

36.  The  Charter  and  Articles  of  Association 75 

37.  The  Purposes  for  Which  a  Corporation  is  Formed 76 

38.  Powers  Common  to  All  Corporations 77 


CONTENTS.  ix 
SECTION.                                                                                                                                                  PAGE. 

39.  Ultra  Vires  Acts 77 

40.  Amendment  of  Charter  and  Articles 79 

41.  Irregular    Incorporation 82 

42.  Forfeiture  of  Charter  by  Non-User 82 

43.  The  Beginning  of  the  Existence  of  a  Corporation 82 

44.  By-Laws    82 

45.  Rules  of  Order..  87 


PART  IV. 


DIRECTORS  AND  OFFICERS. 

SECTION.  PAGE. 

46.  Number,  Qualifications,  Powers,  and  Right  to  Choose  and 

Remove    91 

47.  Directors'    Meetings 98 

48.  The    President 100 

49.  The  Vice-President    101 

50.  The  Secretary 102 

51.  The  Treasurer 103 

52.  The  Managing  Director  and  General  Manager 104 

53.  The  Counsel 104 

54.  The  Auditor 105 

55.  The   Committees. . .  .105 


PART  V. 


CAPITAL  STOCK  AND  BONDS. 

SECTION.  PAGE. 

56.  The  Nature  of  Capital  Stock 109 

57.  Fully  Paid  and  Partly  Paid  Stock Ill 

58.  Bonus  and  Watered  Stock Ill 

59.  Usual  Kinds  of  Stock 113 

60.  Registrars  and  Transfer  Agents 120 

€1.     Incidents  of  Issue  and  Transfer  of  Stock 123 

62.  Bonds    ,                                                                                          .  125 


CONTENTS. 


PART  VI. 


STOCKHOLDERS. 

SECTION.  PAGE. 

63.  Stockholders'  Powers,  Rights  and  Liabilities 133 

64.  Stockholders'  Meetings    134 


PAKT  VII. 

CORPORATION  BOOKKEEPING,  AUDITING  AND  ACCOUNTING. 


SECTION.  PAGE. 

65.  Corporation  Bookkeeping,  Auditing  and  Accounting 143 

66.  A  Corporation's  Books 167 

67.  The  Minute  Book 168 

68.  The  Stockholders'    Ledger 171 

69.  The  Book  of  Stock  Certificates 172 

70.  The  Transfer    Book 174 

71.  The  Dividend   Book 176 

72.  The  Subscription  Book    176 

73.  The  Instalment  and  Instalment  Scrip  Books. . , 178 

74.  The  Corporation    Calendar 179 

75.  Books  Required  by  Law 181 


PAKT  VIII. 


DISSOLUTION,  CONSOLIDATION,  AND  REORGANIZATION,  AND 
RENEWAL  OF  CHARTER. 

SECTION.  PAGE. 

76.  Dissolution  of  a  Private  Corporation 185 

77.  Consolidation  of  Private  Corporations 187 

78.  Reorganization  of  a  Private  Corporation 188 

79.  Renewal  of  Charter. .  .  190 


CONTENTS.  T\ 

PAET  IX. 

FORMS. 

PAGE. 

Illustrative   Instruments  of  Procedure  for  the  Formation,  Or- 
ganization, Management    and  Consolidation  of  Private  Busi- 

Corporations 193  et  seq. 


PART  X. 

MISCELLANEOUS. 

PAGE. 

Trusts  and  Voting  Trusts 257 

Corporation    Receiverships 260 

Corporate    Credit 262 

Marketing  Notes  in  the  Open  Market 267 

The  Corporate  Seal  and  Corporate  Signatures 270 

The  Corporation  Lawyer 272 

Corporation  Bond  and  Stock  Investments 275 

The  Magnitude  of  Corporations 278 

Distribution  of  Corporate  Wealth 281 

Origin  of  Commercial  Manifestations  of  Corporate  Existence: 
Stock  Exchanges,  Stock  Brokers,  and  Evidences  of  Title  to 

Corporate  Shares  and  Debt  Secured  by  Mortgage 283 

Unintelligent   Competition 289 

Advantage  of  Foreign  Corporations  in  Courts 299 


APPENDIX. 

PAGE. 

Rules  of  the  New  York  Stock  Exchange  on  the  Admission  of 
Listed  and  Unlisted  Securities 303 

Bibliography  of  Useful  Books  on  Corporations 311 

Charts  Showing  Possible  Distribution  of  Officers,  etc.,  and  Their 
Responsibility  314 

Chart  Showing  How  a  Great  Engineering  Company  Distributes 
the  Management  of  Its  Business 315 

Tables  of  Incorporation  Fees,  Taxes,  etc 316  et  seq. 

Table  of  the  Income-Yielding  Capacity  of  Stocks 320 

Tables  of  the  Interest-Yielding  Capacity  of  Bonds 321  et  seq. 


{UNIVERSITY 


OF 


MODERN  BUSINESS  CORPORATIONS. 


PRIVATE    CORPORATIONS:    DEFINITION,    ADVANTAGES, 
LEGAL  STATUS. 

§  1.  Corporation:  Definition. 

2.  Kinds  of  Private  Corporations. 

3.  By  What  Laws  a  Private  Corporation  is  Governed. 

4.  Incorporation  in  More  than  One  State. 

5.  Special  Acts  of  Incorporation. 

6.  Difference  Between  a  Private  Corporation  and  a  Joint  Stock 

Company. 

7.  Advantages  o    Incorporation. 

8.  Two  Theories  of  the  Duty  of  a  State  in  Creating  a  Corporation. 

§1.    CORPORATION:    DEFINITION. 

According  to  contemporary  practices,  a  corporation  is  an 
association  of  natural  persons,  or  of  artificial  persons  (other " 
corporations),  or  of  both  together,  authorized  by  law  to  act  as 
a  unit,  under  a  corporate  name,  for  the  accomplishment  of 
certain  definite  and  prescribed  purposes.  It  is  a  "person"  con- 
stituted by  law,  separate  and  distinct  from  its  stockholders, 
and,  in  a  certain  sense,  is  a  citizen.  Actions  at  law  may  be  main- 
tained against  it  the  same  as  against  a  natural  person.  "Com- 
pany" is  the  word  commonly  used  in  speaking  of  a  corporation, 
though  it  is  wider  in  its  definition  and  may  refer  to  a  partner- 
ship, or  a  firm,  or  to  a  joint  stock  association,  as  well  as  to  a 
corporation.  A  corporation  has  its  origin  in  an  agreement  be- 
tween individuals,  but  incorporation  becomes  effective  only 
through  the  operation  of  a  special  charter  or  a  general  enabling 
act,  whose  provisions  are  accepted  by  the  execution  of  the 
agreement,  called  the  articles  of  association. 

1 


2  MODERN   BUSINESS   CORPORATIONS. 

§2.  KINDS  OF  PRIVATE  CORPORATIONS. 

Private  corporations  are  classified  (1)  "for  profit/'  or  (2) 
"not  for  profit."  The  first  are  for  money-making  purposes  and 
include  commercial,  or  business,  or  industrial  corporations,  such 
as  manufacturing,  refining,  mercantile  corporations;  and  finan- 
cial, or  moneyed  corporations,  such  as  banks,  trust  companies, 
and  insurance  companies ;  and  transportation  corporations,  such 
as  railroads,  steamship,  telegraph,  and  telephone  companies ;  and 
development  companies,  such  as  mining,  oil  and  stone  quarry 
companies.  Corporations  "not  for  profit"  include  benevolent 
and  religious  associations,  certain  colleges  and  schools,  club- 
houses, and  the  like.  Semi-public  or  franchise  corporations  are 
those  which  operate  under  franchises  that  usually  relieve  them, 
in  some  measure,  from  competition,  and  which  the  general  pub- 
lic desires  to  patronize  so  far  as  convenient  or  necessary.  These 
are  public  utility  corporations,  such  as  railroad,  street  car,  tele- 
graph, telephone,  electric  light,  gas  and  heating  companies. 

§  3.   BY  WHAT  LAWS  A  PRIVATE  CORPORATION  IS  GOV- 
ERNED. 

All  the  states  have  general  enabling  acts  relative  to  corpora- 
tions. A  business  corporation  usually  has  all  the  powers  granted 
it  by  the  state  under  whose  laws  it  was  organized,  and  it  is  gov- 
erned primarily  by  the  laws  of  that  state.  It  does  business  in 
other  states  by  sufferance,  but  no  matter  what  are  the  corpora- 
tion laws  of  other  states  in  which  it  may  do  business,  it  is  not 
usual,  so  far  as  charter  rights  are  concerned,  that  restrictions 
are  imposed  upon  it  other  than  the  restrictions  imposed  by  its 
parent  state.  As  it  is  impossible  for  a  parent  state  to  give  extra- 
territorial force  to  its  laws,  however,  so  far  as  a  company  does 
business  in  another  state  than  that  in  which  it  is  organized, 
that  state  has  the  power  to  impose  on  the  capital  or  interest* 
represented  in  its  territory  the  same  restrictions  that  apply  to 
corporations  organized  under  its  own  laws.  Insurance  companies 
and  banks,  building  and  loan  associations,  and  other  financial 
companies,  and  steam  railway  corporations  are  more  frequently 


CORPORATION:  DEFINITION,  ADVANTAGES,  LEGAL  STATUS.      3 

regulated  by  the  individual  states  in  which  they  do  business 
than  are  other  kinds  of  corporations.  Citizens  of  a  state  whose 
laws  stringently  regulate  the  organization  of  corporations  under 
its  authority  may  organize  under  the  laws  of  a  state  which  gives 
liberal  privileges  to  corporations  and  may  then  usually  do 
business  in  the  state  of  their  residence  with  all  the  privileges 
their  charter  grants. 

It  has  not  been  determined  that  congress  possesses,  under  the 
constitutional  right  to  regulate  interstate  commerce,  the  power 
to  charter  corporations  which  do  an  interstate  business.  It 
makes  a  practice  of  chartering  national  banks  and  certain  other 
corporations  under  the  authority  of  the  constitution  to  maintain 
the  national  physical  existence.  But  it  is  as  a  means  of  executing 
powers  of  the  national  government,  and  not  as  an  end,  that 
congress  creates  a  corporation.  Professor  Wilgus,  of  the  Uni- 
versity of  Michigan,  argues  very  well  in  a  monograph  entitled 
A  National  Incorporation  Law,  that  congress  has  the  power 
to  create  corporations  which  are  engaged  in  interstate  busi- 
ness. 


§  4.    INCORPORATION  IN  MORE  THAN  ONE  STATE. 

.  Sometimes  a  company,  or  what  is  to  all  intents  and  purposes 
one  company,  is  incorporated  under  the  laws  of  several  states. 
This  happens  in  the  case  of  railways  that  have  interstate  lines. 
The  charters  are  the  same,  or  similar,  in  the  several  states,  and 
all  the  lines  are  managed  by  one  governing  body.  Under  former 
rulings  it  was  held  that  the  several  corporations  maintain  a  sep- 
arate and  individual  identity.  Judge  Seymour  D.  Thompson 
says  in  his  work  on  corporations :  "This  casuistry  was  not 
suited  to  the  practical 'needs  of  a  business  people;  and  conse- 
quently the  court  which  first  propounded  it  was  compelled  to 
abandon  the  doctrine.  *  *  *  Accordingly  the  doctrine  of 
the  court  now  is  that  several  states  may,  by  competent  legisla- 
tion, unite  in  creating  the  same  corporation  or  in  combining 
several  pre-existing  corporations  into  a  single  one ;  that  one  state 
may  make  a  corporation  of  another  state,  as  thus  organized  and 


4  MODERN   BUSINESS   CORPORATIONS. 

conducted,  a  corporation  of  its  own  as  to  any  property  within 
its  territorial  jurisdiction;  and  that  a  state  may  by  an  enabling 
act  authorize  a  corporation  created  in  another  state  .to  build 
and  use  a  railroad  within  its  own  limitations  without  creating 
a  new  corporation."  Ordinary  private  business  corporations  are 
not  concerned  in  the  ability  of  a  corporation  to  be  the  creature 
of  more  than  one  state. 

§  5.    SPECIAL  ACTS  OF  INCORPORATION. 

The  creation  of  corporations  by  special  legislation  is  now  gen- 
erally prohibited  by  the  state  constitutions,  but  a  few  years  ago 
all  corporations  were  so  created.  The  territories  are  prohibited 
by  federal  statute  from  granting  private  charters.  In  some  in- 
stances where  special  charters  are  prohibited  by  statute,  the  pro- 
hibitory legislation  applies  only  to  certain  kinds  of  corporations. 
Current  legislation  tends  to  limit  the  field  in  which  private  cor- 
porations may  be  created  by  special  act.  It  would  be  an  extraor- 
dinary private  business  corporation  that  could  not  be  organized 
satisfactorily  under  the  existing  laws  of  one  of  our  common- 
wealths. 

§  6.    DIFFERENCE  BETWEEN  A  PRIVATE  CORPORATION 
AND  A  JOINT  STOCK  COMPANY. 

A  joint  stock  company  is  a  partnership,  composed  of  num'erous 
partners,  which  has  the  following  features  in  common  with  a 
corporation:  (1)  Continuousness,  so  that  any  member  may 
transfer  his  shares  (with  or  without  the  consent  of  the  other 
members),  and  thus  introduce  a  new  partner  without  dissolving 
the  previous  business  body.  (2)  A  board  of  directors  or  trus- 
tees controls  the  body,  and  no  member  of  the  company  has  agency 
to  act  for  the  company  as  whole.  It  differs  from  a  corporation 
in  that  the  members  of  the  joint  stock  company  are  liable  for 
the  debts  of  the  company  jointly  and  severally  as  in  a  partner- 
ship, whereas  the  members  of  a  corporation  are  not  liable  for  the 
debts  of  their  organization,  except  when  made  so  by  statute,  or 
when  special  qualifications  have  been  made  rendering  them  lia- 


CORPORATION:  DEFINITION,  ADVANTAGES,  LEGAL  STATUS.      5 

ble.  And  it  also  differs  in  that  a  joint  stock  company  sues  and 
defends  in  the  name  of  an  officer  empowered  to  sue  and  defend, 
while  a  corporation  sues  and  defends  under  its  corporate  name. 
A  joint  stock  company  may  exist  without  express  authority  from 
a  state,  as  it  is  created  by  contract.  In  many  states,  however, 
such  companies  are  provided  for  by  statute.  The  joint  stock  com- 
pany is  an  infrequent  form  of  American  business  association. 

§  7.   ADVANTAGES  OF  INCORPORATION. 

The  first  advantage  of  incorporation  is  that  of  continuous  suc- 
cession, or  indefinite  duration.  Unless  it  becomes  insolvent,  or 
voluntarily  dissolves,  or  the  term  of  its  existence,  fixed  by  law, 
expires,  the  corporation  remains  a  business  "person."  Any  for- 
tuitous vicissitudes,  such  as  a  disagreement  of  stockholders,  in- 
solvency of  stockholders,  death  of  a  stockholder  or  disability 
in  any  other  direction,  does  not  affect  the  life  of  the  corporate 
body.  This  intact  condition  is  rendered  possible  in  ordinary 
business  corporations  through  the  shares  of  stock  which  repre- 
sent each  shareholder's  interest  in  the  business,  and  which  may 
be  transferred  indefinitely  without  the  act  of  transference,  per  se, 
affecting  the  corporation  in  the  least.  A  second  advantage  is 
that,  in  providing  the  funds  for  establishing  ancTrunning  a  busi- 
ness, the  capitalization  may  be  divided  almost  indefinitely,  so 
that  people  of  small  means  as  well  as  those  of  large  may  contrib- 
ute their  share  of  funds  and  receive  their  share  of  dividends  on 
their  contribution.  The  stock  of  a  corporation  may  have  a  par 
value  of  $1,  $50,  or  $100  per  share,  the  most  common  amounts,  or 
any  other  amount  the  incorporators  may  elect,  if  minimum  and 
maximum  amounts  are  not  prescribed  by  state  law.  In  financial, 
mercantile,  manufacturing  and  transportation  corporations  the 
par  value  is  usually  $100,  while  in  mining  and  oil  companies  the 
par  value  is  often  $1  per  share.  Small  investors  frequently  specu- 
late in  development  companies  to  the  extent  of  $25  or  $50, 
whereas  if  they  were  compelled  to  pay  $100  per  share  they 
could  not  join  in  the  company.  In  mining  ventures  it  is  fre- 
quently the  case  that  half  the  stock  is  taken  in  small  subscrip- 


O  MODERN   BUSINESS    CORPORATIONS. 

.tions.  Another^advantage  of  incorporation  is  that  the  stock 
representing  the  holder's  share  may  be  used  as  collateral  security 
for  borrowed  money.  A  partner  cannot  use  his  interest  in  a  busi- 
ness as  security  for  a  loan  in  the  way  of  a  pledge.  Where  there 
is  actual  value  behind  it,  stock  is  also  more  readily  marketable 
than  a  partnership  interest  and  may  be  transferred  by  the  sim- 
ple method  of  indorsement.  When  an  individual  or  firm  wants 
to  sell  a  large  and  established  business  which  produces  a  fair 
and  uniform  income,  the  easiest  way  to  do  this  is  by  incorporat- 
ing the  business.  The  larger  a  business  is  the  more  difficult  it 
is  to  find  buyers.  By  incorporating,  interests  in  the  business 
may  be  sold  to  many  buyers  and  probably  a  larger  price  can  be 
realized  than  if  the  business  had  been  sold  to  a  single  buyer  or 
to  two  or  more  partners.  When  an  individual  requires  money  for 
his  business,  by  incorporating  and  selling  stock  he  avoids  the 
dangers  that  come  from  admitting  partners.  The  limited  liar 
bility  feature  of  a  corporation  is  one  of  its  chiefest  advantages. 
A  subscriber  to  stock  in  a  commercial  corporation  is  liable  only 
to  the  par  value  of  the  stock  purchased.  If  it  is  issued  "full 
paid"  in  bona  fide  payment  for  property  or  services,  he  is  not 
liable  unless  fraud  is  provable  in  the  matter  of  the  valuation 
of  the  property  or  services.  In  banks,  trust  companies,  and 
other  financial  institutions  a  double  liability  is  usually  imposed, 
making  the  stockholder  liable  in  the  amount  of  his  total  holdings 
as  expressed  by  the  par  value  of  a  share  multiplied  by  the  num- 
ber of  shares  held,  and  to  the  amount  of  the  par  value  of  his 
holdings  in  addition.  Thus  the  subscriber  to  stock  always  knows 
how  much  he  is  risking  in  taking  it,  and  no  one  who  buys  his 
stock  is  liable  for  more  than  the  original  holder.  But  in  a  part- 
nership the  partners  are  jointly  and  severally  liable  to  the  ex- 
tent of  all  their  possessions  for  the  debts  of  the  firm,  less  the 
amount  of  the  legal  exemption  for  debts,  and  for  all  other  lia- 
bilities. For  instance,  if  a  partner,  even  through  haste  or  mis- 
take, makes  an  oral  agreement  or  signs  a  contract,  if  an  em- 
ploye commits  an  error  or  is  injured,  or  a  man  outside  of  the 
business  suffers  damages  by  carelessness  on  the  part  of  the  firm 
in  protecting  the  public  from  the  machinery  or  the  apparatus  of 


CORPORATION:  DEFINITION,  ADVANTAGES,  LEGAL  STATUS.      7 

its  business,  or  from  carelessness  of  an  employe,  all  a  partner's 
means  stands  as  security  for  a  judgment  against  the  firm  guilty 
of  such  inadvertence  or  whose  agent  or  employe  is  guilty.  The 
vicissitudes  which  may  overtake  a  partnership  are  many.  A  part- 
ner may  withdraw  his  interest  in  a  business,  crippling  or  ruin- 
ing the  business.  He  may  be  sick,  become  insane,  or  die,  causing 
a  dissolution  without  the  consent  of  the  other  partners.  If  pri- 
vate creditors  seize  a  partner's  interest,  the  firm  is  dissolved.  If 
a  partner  dies,  his  administrator  or  executor  may  withdraw  that 
partner's  share.  His  estate  then  usually  receives  only  the  value  of 
his  portion  of  the  tangible  assets,  without  the  added  value  of  good 
will  or  earning  capacity.  On  account  of  large  earning  capacity, 
stock  in  a  corporation  may  be  worth  twice  its  par  value.  An 
administrator  sells  the  stock  for  the  market  price,  and  could  not, 
if  he  would,  considering  the  business  to  be  well  managed  and 
solvent,  withdraw  from  the  business  the  interests  represented  by 
the  stodk.  Moreover,  one  partner  cannot  sell  his  interest  with- 
out the  consent  of  the  other  partners  in  the  business,  nor  can  he 
take  his  children  into  the  business,  or,  indeed,  permit  them  to  be- 
come apprentices,  without  the  consent  of  the  other  partners. 
The  prestige  and  good  will  of  an  unincorporated  company  may 
attach  to  one  of  the  firm,  while  they  are  more  likely  to  be  identi- 
fied with  the  company  in  case  of  incorporation.  And  by  no 
means  the  least  advantage,  the  corporate  form  of  business  ad- 
ministration offers  a  uniform,  orderly,  well-defined  and  systema- 
tic plan  of  procedure,  a  mechanism  for  the  conduct  of  business, 
that,  when  properly  used,  is  as  superior  to  the  partnership  form 
as  is  a  modern  locomotive  to  a  locomotive  of  fifty  years  ago.  So, 
when  large  interests  are  at  stake,  the  corporate  form  of  associa- 
tion is  safer  and  more  satisfactory. 

§  8.    TWO  THEORIES  OF  THE  DUTY  OF  A  STATE  IN  CRE- 
ATING A  CORPORATION. 

In  a  report  which  a  committee  on  corporations  made  to  the 
legislature  of  Massachusetts  in  1903  there  were  set  forth  two 
general  theories,  as  revealed  by  the  state  laws  bearing  on  cor- 


3  MODERN   BUSINESS    CORPORATIONS. 

porations,  as  to  a  state's  duties  in  creating  corporations.  The 
first  is  the  old  theory  that,  being  creatures  of  the  state,  corpora- 
tions should  be  guaranteed  by  it  to  the  public  in  particulars  of 
responsibility  and  management ;  the  second  is  the  opposite,  mod- 
ern theory  that,  in  the  absence  of  fraud  in  a  corporation's  crea- 
tion or  government,  the  common  business  corporation  should 
be  permitted  to  do  anything  that  an  individual  may  do.  Under 
the  former  theory,  the  capital  stock  of  the  corporation  was,  in 
the  law,  considered  a  guarantee  fund  for  the  payment  of  creditors 
as  well  as  a  means  of  conveniently  measuring  the  interest  of  the 
individual  owners  of  the  corporation.  There  resulted  from  this 
theory  the  principle  that  the  capital  stock,  being  in  the  nature 
of  a  guarantee  fund,  shall  be  paid  for  at  its  par  value  in  actual 
cash,  and  other  provisions  protective  of  creditors,  such  as  that 
wherein  is  provided  that  the  debts  of  a  corporation  shall  not 
exceed  its  capital  stock,  a  provision  designed  in  the  interests 
both  of  creditors  and  stockholders,  who  are  looked  after  as  care- 
fully as  if,  when  connected  with  corporation  matters,  they  were 
wards  of  the  state.  Other  provisions  of  laws  enacted  under  this 
theory  limit  the  par  value  of  shares,  make  stockholders  liable 
in  excess  of  their  actual  or  contracted  investment,  and  impose 
on  directors  liability  for  debts  of  the  corporation  which  may 
arise  out  of  the  ordinary  chances  of  business.  The  results  of 
this  system  are  that  technical  and  sometimes  dishonest  means 
are  created  for  avoiding  the  laws,  and  capital  organizes  itself 
under  the  more  liberal  states,  states  wherein  frequently  not  any 
of  the  capital  is  represented  or  the  business  transacted.  The 
states  having  these  laws  have  failed  in  their  attempts  to  give 
the  intended  security  to  creditors  and  stockholders,  and  the  de- 
cisions of  the  courts  under  these  laws  are  confused.  Under  the 
modern  theory,  the  state  owes  no  duty  to  persons  who  deal  with 
corporations  to  look  after  the  solvency  of  corporate  business  en- 
terprises, nor  to  the  stockholders  to  protect  them  from  the  conse- 
quences of  going  into  such  concerns,  the  idea  being  that  in  the 
case  of  ordinary  business  corporations,  the  state's  duty  ends  in 
providing  clearly  that  creditors  and  stockholders  shall  be  able 
at  all  times  to  secure  the  precise  facts  concerning  the  organiza- 


CORPORATION :    DEFINITION,    ADVANTAGES,   LEGAL   STATUS.         9 

tion  and  management  of  such  corporations,  and  especially  that 
full  publicity  shall  be  given  to  all  the  details  of  the  original 
organization.  Charles  A.  Conant  says  in  his  book  entitled  Wall 
Street  and  the  Country :  "It  is  a  question  whether  the  protection 
of  the  investor  in  the  future  should  not  proceed  along  the  lines 
of  his  economic  education  rather  than  along  the  lines  of  new  re- 
strictions upon  corporations.  Just  so  far  as  the  government  re- 
lieves the  citizen  of  the  obligation  of  looking  out  for  himself,  it 
promotes  a  condition  of  dependence  upon  the  state  which  is 
detrimental  to  genuine  economic  progress."  In  the  last  decade 
many  radical  changes  have  taken  place  in  the  industrial  and 
economic  conditions  of  the  United  States.  The  aggregating 
tendency  of  capital  has  resulted  in  the  organization  of  thousands 
of  corporations.  Some  of  the  states  have  recognized  the  neces- 
sity of  providing  for  the  fullest  development  of  the  legal  entity 
of  the  business  corporation  and  have  enacted  laws  which  con- 
cede the  rights  and  privileges  of  that  entity.  New  Jersey,  Dela- 
ware, Maine,  and  South  Dakota  adopted  liberalized  corporation 
laws,  and  were  followed  by  New  York,  Massachusetts,  the  Dis- 
trict of  Columbia,  Connecticut,  West  Virginia,  Nevada,  Arizona, 
Virginia,  New  Mexico,  and  Washington,  Several  states  now 
have  commissions  at  work  revising  their  corporation  laws.  Par- 
ticular interest  will  attach  to  the  result  of  the  work  of  the 
Minnesota  commission,  which  has  adopted  the  most  thorough- 
going system  of  investigation  and  revision  that  any  state  has 
ever  attempted. 


PART  II. 

THE  FORMATION  AND  ORGANIZATION  OF  A  PRI- 
VATE CORPORATION. 


11 


THE  FORMATION  AND  ORGANIZATION  OP  A  PRIVATE 
CORPORATION. 

%  9.  Who  May  Form  a  Private  Corporation. 

10.  Fortuitous  Association  of  Individuals. 

11.  Definition  of  Promoter,  and  the  Promoter's  Functions. 

12.  Promoters'  Profits. 

13.  Fiduciary  Relation  of  Promoter  to  Prospective  Corporation. 

14.  Responsibility  of  Fiduciary  Relation  and  Recovery  for  Breach. 

15.  Promoter's  Fraudulent  Representations  or  Concealment,  and 

Liability  Therefor. 

16.  Failure  of  Organization  of  the  Corporation  and  Promoter's 

Liability. 

17.  Corporation's  Liability  for  Services  Rendered  by  Promoter. 

18.  Promoter's  Lack  of  Agency. 

19.  Contracts  Made  with  Promoter. 

20.  Inter-relation  of  Promoters. 

21.  Aiders  and  Abettors  of  a  Fraudulent  Promoter. 

22.  Where  to  Incorporate. 

23.  Special   Advantages   and    Disadvantages   in   the   Corporation 

Laws  of  the  Liberal  Commonwealths. 

24.  Relation  to  the  Creating  State  of  a  Corporation  Whose  Prin- 

cipal Office  and  Business  are  Located  in  a  Foreign  State. 

25.  A  Corporation's  Relation  to  Foreign  States. 

26.  Capitalization:  Definition. 

.27.     Determining  the  Amount  of  Capitalization. 

28.  More  Things  in  Regard  to  Stocks  and  Bonds  to  be  Considered 

Before  Capitalizing. 

29.  Capitalizing  at  Less  Than  Real  Value. 

30.  Placing  Stocks  and  Bonds. 

30a.  Financial  Banking  and  Trust  Organization. 

31.  The  Stock  Exchange. 

32.  The  Sale  Price  of  Stocks  and  Bonds  With  Reference  to  Time 

of  Issue. 

53.  Changing  a  One-Man  Business  or  Partnership  into  a  Corpora- 
tion. 

34.  Proper  Valuation  of  Private  Business  or  Partnership  Assets, 
Patents,  and  Other  Property  to  Safely  Constitute  Stock  Ex- 
changed for  Them  Full-Paid. 

55.     Stock  Subscriptions. 

13 


14  MODERN   BUSINESS   CORPORATIONS. 


THE  FORMATION  OF  A  PRIVATE  CORPORATION". 

§'f.    Who  May  Form  a  Private  Corporation. 

Three  or  more  natural  persons  (the  expression  "natural  per- 
sons" means  men  or  women,  in  contradistinction  to  "artificial 
persons,"  such  as  corporations)  of  legal  age  may  come  to- 
gether for  the  formation  of  a  corporation.  Sometimes  one  or 
more  of  the  number  must  have  citizenship  in  the  state  under 
whose  laws  the  corporation  organizes.  Married  women  may  be 
corporators  if  the  statutes  of  the  state  in  which  the  corporation 
is  organized  have  removed  the  common  law  disabilities  of  mar- 
ried women.  Any  natural  person  capable  of  contracting  may  be 
a  corporator.  Partnerships,  corporations,  minors,  persons  men- 
tally incompetent,  may  not  be  original  subscribers  to  stock, 
though,  by  transference,  they  may  come  into  possession  of  stock 
and  may  hold  it.  The  personality,  previous  business  success,  and 
reputation  for  integrity  of  the  corporators  often  have  much 
to  do  with  the  sale  of  stock  after  a  company  has  been  incor- 
porated, so  that  a  promoter  should  usually  look  beyond  the  mere 
ability  of  a  person  to  furnish  money  for  his  enterprise. 

§  10.    Fortuitous  Association  of  Individuals. 

It  may  be  desirable  that  a  partnership  concern  be  changed  into 
a  corporation,  in  which  case  the  partners  alone,  or  with  friends 
or  other  investors,  become  the  corporators.  Or  a  person  may 
have  a  plan  for  business  which  he  communicates  to  his  friends, 
or  to  any  persons  having  sufficient  means  to  take  stock,  who  may 
agree  to  join  him  in  the  formation  of  a  corporation.  Bankers 
and  capitalists  have  frequent  opportunity  to  know  of  desirable 
manufacturing  businesses,  or  transportation  or  development 
schemes,  and,  when  satisfied  of  the  comparative  safety  and  of 
the  reasonable  prospects  for  good  returns,  choose  a  few  of  their 
friends  and  acquaintances  and  offer  them  the  opportunit}^  to  put 
in  money  to  furnish  the  funds  necessary  to  start  the  company. 
Usually  the  banker  or  capitalist  does  not  make  any  commission 


FORMATION  AND  ORGANIZATION  OF  A  PRIVATE  CORPORATION.       15 

or  profit  because  of  his  little  work  in  getting  the  necessary  capi- 
tal in  addition  to  what  he  puts  in.  He  does  not  go  far  out  of  his 
way  to  get  the  additional  money.  The  association  of  himself 
and  the  other  incorporators  is  largely  fortuitous.  He  knows  sev- 
eral people  with  money  to  invest,  and  he  sets  before  them  the 
plans  of  the  company.  They  invest  or  do  not  invest  as  they 
choose,  without  having  been  especially  sought  out  and  having 
had  applied  to  them  the  particular  and  enthusiastic  persuasion 
that  the  professional  former  of  corporations  would  use. 

Formation  by  Promoters. 

§  11.  Definition  of  "Promoter"  and  the  Promoter's  Functions. 
The  word  "promoter"  has  not  yet  a  legal  definition,  but  is  a 
business  term  familiar  in  corporate  finance.  A  promoter,  in  busi- 
ness practice,  is  one  who  seeks  fields  for  investment  in  new  enter- 
prises or  in  the  extension  or  diversification  of  established  indus- 
tries, and,  for  a  consideration,  forms  and  organizes  a  corpora- 
tion to  develop  the  particular  field  he  has  chosen.  The  promoter 
commonly  attends  to  everything  connected  with  the  floating  of 
an  enterprise.  In  the  first  place  he  finds  an  enterprise  with 
prospects  of  good  returns  on  the  money  to  be  invested ;  he  em- 
ploys technical  experts  in  the  line  of  industry  to  prepare  the 
figures  of  cost  and  prospective  returns,  so  he  and  those  to  be 
interested  with  him  may  know  as  exactly  as  may  be  what  they 
have  and  what  they  may  expect ;  he  prepares  a  prospectus  based 
on  the  expert's  figures;  he  secures  legislation,  where  that  is 
necessary;  he  secures  options  and  leases,  where  they  must  be 
secured.  In  short,  he  "assembles"  the  proposition.  Then  he 
employs  a  corporation  lawyer  to  prepare  the  articles  of  incorpora- 
tion, and  secures  the  necessary  subscribers  to  the  articles,  sees 
that  the  articles  are  recorded  and  filed,  that  the  certificate  of  in- 
corporation is  issued,  and  pays  the  incorporation  costs ;  he  sells 
the  stock  of  the  company  directly  to  the  public,  or  to  bankers  or 
other  underwriters  whom  he  has  usually  provided  for  before  or- 
ganizing the  corporation,  and  ordinarily  he  takes  his  own  profit 
out  in  stock.  His  relation  to  the  corporation  is  fiduciary. 


16  MODERN   BUSINESS    CORPORATIONS. 

§  12.  Promoters'  Profits.  The  promoter  has  to  create  value 
to  entitle  him  to  profit.  He  provides  a  new  or  original  means  of 
making  money,  and  makes  the  means  productive  through  the  de- 
velopment of  a  "going"  concern  for  the  utilization  of  that  means. 
His  profit,  though  large,  is  legitimate  profit.  It  is  arrived  at  usu- 
ally as  follows.  From  the  figures  of  the  technical  expert  on  the 
proposition,  the  promoter  arrives  at  a  conclusion  as  to  the  total 
net  profits  of  the  business  when  it  has  been  developed.  If  he  is 
a  conservative  man,  he  capitalizes  his  business  on  the  basis  of  its 
average  earning  capacity  with  only  enough  "water"  to  provide 
for  increased  earnings.  If  the  proposition  was  one  worth  his  ef- 
forts, it  was  a  proposition  which  could  be  capitalized  at  a  figure 
greatly  in  excess  of  what  he  paid  for  it  in  its  undeveloped  con- 
dition, and  also  in  excess  of  this  cost  price  and  the  development 
cost  combined.  The  difference  between  these  costs  and  the  sum 
which  he  receives  for  the  stock  represents  his  profit.  If  options 
have  been  paid  for  before  the  property  has  been  bought,  their 
cost  usually  comes  out  of  the  promoter's  profit.  As  a  rule,  the 
earning  capacity  of  his  proposition  is  such  that  the  promoter  can 
capitalize  so  as  to  provide  sufficient  working  capital  and  sell  the 
common  stock  at  from  fifty  to  seventy-five  cents  on  the  dollar, 
which  is  desirable  to  facilitate  the  sale,  and  still  have  for  him- 
self a  margin  of  profit  of  from  fifteen  to  thirty  per  cent  of  the 
capital  stock.  He  is  perhaps  offering  stock  that  will  some  time 
net  the  investor  six  to  twenty  per  cent.  The  promoter  is 
equipped  for  his  work  by  his  resourcefulness  in  finding  new  and 
worthy  enterprises,  and  ability  to  harmonize  interests  and  handle 
men,  by  his  financial  connections,  and  his  business  experience 
generally.  To  combine  the  original  resources  for  wealth  and  the 
'money  to  develop  them,  he  works  according  to  system,  going  out 
to  find  the  resources,  perhaps,  and  making  definite  and  extensive 
effort  to  secure  the  funds  for  operation.  The  association  of  in- 
dividuals in  the  promoter's  corporation  is  not  fortuitous,  but  is 
ihe  result  of  the  work  of  a  trained  business  agent,  the  promoter, 
who  is  working  for  his  own  profit,  and  is  earning  his  profit  by 
assembling  the  business  proposition  and  by  securing  the  incorpo- 
rators  and  other  investors. 


FORMATION  AND  ORGANIZATION  OF  A  PRIVATE  CORPORATION.       17 

§•  13.  Fiduciary  Relation  of  Promoter  to  Prospective  Corpo- 
ration. Before  the  organization  of  a  corporation  the  promoter  of 
that  corporation  is  regarded  as  a  trustee  for  those  who  shall  be 
entitled  to  act  for  it,  and  can  be  held  to  this  fiduciary  relation 
until  the  corporation  has  been  in  existence  and  engaged  in  busi- 
ness for  a  year,  when  responsibility  for  the  relation  ceases. 
Hence,  when  the  corporation  comes  into  existence  the  promoter 
must  make  a  full  and  fair  disclosure  of  all  his  acts  as  promoter, 
and  he  must  include  a  disclosure  in  full  of  what  he  is  to  receive 
as  compensation  for  bringing  the  company  into  existence. 

§  14.  Responsibility  of  Fiduciary  Relation  and  Recovery  for 
Breach.  The  corporation  which  the  promoter  organizes  is  an  ar- 
tificial child  of  the  promoter  which  is  of  age  at  birth.  To  give 
this  child  an  independent  being,  the  promoter  is  bound  to  give 
his  corporation  a  board  of  directors  which,  in  its  dealings  with 
him,  will  act  for  the  corporation  in  its  capacity  of  a  separate  and 
independent  being  whose  interests  may  or  may  not  be  the  inter- 
ests of  the  promoter.*  The  promoter  is  bound  in  law  not  to  take 
any  secret  or  unfair  advantage  of  the  child.  Hence  he  must 
make  to  the  board  of  directors  or  to  the  stockholders  or  other 
governors,  when  his  corporation  is  organized,  a  full  and  fair  dis- 
closure of  his  transactions  previously  performed  for  the  corpora- 
tion and  his  interest  in  each  of  them,  much  as  the  guardian  of  a 
child  makes  to  the  court  when  the  child  becomes  of  age.  Money 
or  property  this  father  had  received  before  the  birth  of  the  child 
he  must  account  for,  as  having  been  held  in  trust  by  him. 

It  has  been  held  that  a  statement  in  a  prospectus  of  the  promot- 
er^ interest  in  the  transactions  is  a  sufficient  disclosure.  All 
facts  necessary  to  determine  the  desirability  of  a  property  for 

*  If,  however,  the  truth  has  already  been  disclosed  to  those  who 
join  with  the  promoter  in  the  organization  of  the  company,  there 
is  authority  (Lagunas  Nitrate  Co.  v.  Lagunas  Syndicate,  L.  J. 
Ch.  699,  L.  T.  Rep.  N.  S.  334)  for  a  modification  of  this  principle 
to  the  effect  that  duty  is  not  incumbent  on  the  promoter  to  provide 
his  corporation  with  an  independent  board  of  directors. 
MOD.  Bus.  CORP.— 2 


18  MODERN   BUSINESS   CORPORATIONS. 

purchase  constitute  a  full  and  fair  disclosure.  Methods  of  vio- 
lating the  fiduciary  relation  include  the  purchase  of  property 
at  one  price  and  the  sale  of  that  property  to  the  corporation 
at  a  higher  price,  the  receiving  by  the  promoter  of  a  bonus  or 
commission  from  a  vendor  for  negotiating  the  sale  of  the  ven- 
dor's property  to  the  corporation,  secretly  retaining  the  dif- 
ference in  prices,  or  the  bonus  or  commission.  These  are  the 
most  common  violations  of  the  fiduciary  relation.  The  profits 
in  such  cases  are  held  to  belong  to  the  corporation  and  can  be 
recovered  by  suit  against  the  promoter.  When,  however,  the  pro- 
moter of  the  corporation  which  takes  the  property  was  owner  of 
the  property  before  the  fiduciary  relation  began,  what  he  paid 
for  it  is,  in  the  absence  of  fraudulent  representations  and  pro- 
vided the  stock  subscribers  had  opportunity  to  examine  the  prop- 
erty, not  a  matter  for  disclosure,  since,  in  buying  the  property, 
he  acted  for  himself.  And,  if  a  promoter,  having  an  option  on 
property,  sells  to  his  corporation  at  a  profit,  where,  in  the  sub- 
scription papers  or  in  other  form  of  notice  he  says  he  has  an  op- 
tion and  will  sell  the  property  to  the  corporation  for  a  certain 
price,  and  no  representations  were  made  as  to  the  price  he  paid 
for  the  property,  he  does  not  have  to  account  for  the  profits. 

§  15.  Promoter's  Fraudulent  Representations  or  Concealment, 
and  Liability  Therefor.  A  promoter  is  not  liable  for  representa- 
tions made  in  good  faith  with  an  actual  and  honest  belief  in  their 
truth  unless  he  agrees  to  guarantee  his  representations.  But  if 
he  makes  unqualified  assertions  without  knowing  whether  or  not 
they  are  true,  he  is  liable.  If  he  fraudulently  misrepresents  or 
negatively  conceals  facts  which  it  is  his  duty  to  disclose,  one  who 
suffers  loss  may  recover  from  him.  If  subscriptions  to  stock  are 
obtained  by  misrepresenting  or  concealing  facts,  subscribers  may 
recover  damages.  If  the  misrepresentation  is  by  way  of  a  pros- 
pectus, damages  may  be  recovered  the  same  as  if  the  misrepre- 
sentations were  made  by  word  of  mouth.  In  English  law,  after 
shares  of  stock  have  been  transferred  from  the  original  purchaser, 
damages  cannot  be  recovered  by  the  second  purchaser  for  mis- 
representations in  a  prospectus  unless  the  second  purchaser  saw 


FORMATION  AND  ORGANIZATION  OF  A  PRIVATE  CORPORATION.      19 

the  prospectus  before  he  purchased  the  shares.  American  deci- 
sions hold  that  it  is  not  necessary  that  misrepresentations  should 
have  been  communicated  directly  to  the  person  who  was  induced 
thereby  to  purchase  shares ;  it  is  sufficient  that  the  misrepresenta- 
tions deceived  any  person  who  came  to  know  of  them.  A  pro- 
moter is  likewise  liable  for  negative  concealments  which  have  the 
same  effect  as  misrepresentations.  When  a  promoter  conceals 
from  a  corporation  that  he  is  interested  in  a  sale  of  property,  and 
is  the  actual  vendor  of  the  property  to  the  corporation,  and  real- 
izes a  profit  from  the  sale,  the  corporation  may  have  the  sale 
rescinded  and  may  recover  the  money  paid  for  the  property.  It 
has  been  held  that  where  a  promoter  is  held  to  account  for  secret 
profits  he  is  entitled  to  a  set-off  to  the  amount  of  expenses  he  has 
incurred  in  good  faith  in  promoting  the  corporation, — for  ad- 
vertising, brokers,  options,  etc.,  but  not  for  any  sums  he  has  dis- 
pensed fraudulently. 

§  16.  Failure  of  Organization  of  the  Corporation  and  Pro- 
moter's Liability.  If  a  promoter  fails  in  his  attempt  to  organize 
a  corporation  he  is  liable  to  subscribers  for  stock  for  any  sum  of 
money  received  from  them,  unless  he  has  used  the  money  in  for- 
warding the  project  with  the  knowledge  and  consent  of  the  sub- 
scribers. If  the  subscribers  have  agreed  with  a  promoter  that 
they  will  share  losses  with  him  if  the  project  fails,  they  cannot 
recover  in  full.  If  subscribers  agree  to  the  application  the  pro- 
moter makes  of  their  money,  they  have  no  recourse,  unless  the 
project  was  a  swindle  and  they  did  not  have  knowledge  of  this 
fact  until  after  they  had  acquiesced  in  the  application  of  the 
money. 

§  17.  Corporation's  Liability  for  Services  Rendered  by  Pro- 
moter. It  is  a  rule  with  many  apparent  exceptions  that  a  cor- 
poration is  not  liable  for  a  promoter's  services  or  expenses  in- 
curred by  him  in  bringing  the  corporation  into  existence  unless 
the  corporation's  charter  or  a  statute  so  provides.  A  promoter 
is  reasonably  safe,  however,  in  rendering  services  and  expending 
deposits  received  from  stock  subscriptions,  for  decisions  practi- 


20  MODERN   BUSINESS    CORPORATIONS. 

cally  establish  the  principle  that  services  or  expenses  which  are 
necessary  to  the  existence  of  a  corporation  and  the  benefits  of 
which  it  must  accept  if  it  exists  at  all,  must  be  paid  for  by  the 
corporation.  The  logic  of  these  decisions  is  not  clear-cut  and  the 
contact  of  the  decisions  with  established  legal  principles  is  faulty. 
In  order  that  the  corporation  be  bound  for  such  services  and 
expenses,  it  has  been  held  that  they  must  have  been  necessary, 
reasonable,  and  for  the  benefit  of  the  future  corporation,  and 
must  have  been  performed  or  incurred  under  a  contract  with  the 
promoter  and  with  the  expectation  that  they  be  paid  for  or  paid 
by  the  corporation  itself,  and  not  by  the  individual  corporators. 
When  all  the  corporators  request  services  to  be  rendered,  and  no 
other  persons  are  added  to  the  list  of  corporators  or  stockholders 
thereafter,  it  has  been  held  that  the  corporation  is  liable  for  the 
value  of  the  services.  Where  other  persons  join  the  corporators 
after  the  request,  whether  they  join  as  corporators  or  stockhold- 
ers, the  corporation  is  not  liable. 

§  18.  Promoter's  Lack  of  Agency.  A  promoter  is  not  agent 
for  a  corporation  to  be  organized,  because  the  principal  is  not  in 
existence.  He  cannot  affect  the  embryo  corporation  by  his  repre- 
sentations or  assertions  or  by  contracts  made  for  it.  But  he  prac- 
tically becomes  agent  by  adoption  when,  after  the  corporation 
comes  into  existence,  it  adopts  contracts  or  agreements  made  in 
its  behalf  or  accepts  the  benefits  of  such  contracts  or  agreements, 
having  knowledge  of  them  and  having  had  opportunity  to  decline 
them.  Legally  speaking,  he  does  not,  however,  become  agent  in 
fact,  for,  in  order  to  adopt  the  engagements  made  by  the  pro- 
moter in  a  manner  other  than  accepting  their  benefits,  such  cor- 
porate action  is  necessary  as  when  the  corporation  makes  a  con- 
tract in  its  own  behalf.  That  is,  the  corporation  enters  into  a 
new  contract  through  its  officers  or  governing  body.  It  has  also 
been  held  that  an  engagement  made  by  a  promoter  which  would 
not,  in  an  organized  company,  necessarily  be  made  by  formal 
action  of  directors  or  trustees,  but  might  be  made  by  the  presi- 
dent or  manager,  may  be  adopted  without  the  formality  of  con- 
currence by  the  directors  or  trustees. 


FORMATION  AND  ORGANIZATION  OF  A  PRIVATE  CORPORATION.      21 

§  19.  Contracts  Made  With  Promoter.  So  far  as  the  future 
corporation  is  concerned,  contracts  or  engagements  made  with,  a 
promoter  have  been  held  to  amount  only  to  a  proposition  for  a 
contract  with  the  corporation  ip  be  organized.  So  that  when  a 
subscription  to  capital  stock  has  been  given  a  promoter  before 
the  corporation  is  organized  and  there  was  an  acceptance,  and 
the  corporation  later  comes  into  existence  and  accepts  the  sub- 
scription by  issuing  the  subscriber's  certificate,  offering  him  an 
opportunity  to  vote  his  stock,  or  otherwise  recognizing  him  as  a 
subscriber,  the  subscriber  is  bound  for  payment.  It  has  already 
been  seen  that  a  corporation  may  adopt  a  promoter's  contracts 
and  therefore  become  liable  for  them.  But  a  promoter  is  him- 
self liable  for  engagements  contracted  in  the  name  of  his  cor- 
poration until  it  comes  into  actual  existence  and  until  it  adopts 
them  either  impliedly  by  accepting  the  benefits  under  them,  or 
by  action  of  an  officer  or  of  the  governing  body.  In  case  the  cor- 
poration is  not  formed,  the  promoter  is  personally  liable  for  all 
contracts  he  has  made,  and,  if  there  are  several  promoters,  each 
is  liable  for  contracts  he  has  made  or  in  whose  making  he  has 
concurred.  If,  however,  a  creditor  waives  his  right  against  a 
promoter  and  agrees  to  look  to  the  corporation  to  pay  when  it 
shall  be  formed,  the  promoter  is  not  liable.  When  it  has  been  ar- 
ranged that  the  creditor  shall  look  only  to  the  promoter  for  pay, 
the  corporation  cannot  be  held  liable  on  the  contract.  A  part- 
nership arrangement  may  be  made  among  promoters,  when  each 
is  liable  and  all  are  liable  as  are  partners.  In  general,  a  cor- 
poration may  affirm  and  enforce  its  promoter's  contracts  for  its 
own  benefit. 

§  20.  The  Inter-Relation  of  Promoters.  The  relations  that 
.promoters  assume  among  themselves  is  a  matter  of  discretion. 
According  to  the  manner  of  their  association  together  they  will 
be  governed  by  the  law  as  it  applies  to  individuals  or  to  partner- 
ships, and  it  is  a  matter  for  the  promoters  to  determine  which 
they  prefer.  Care  should  be  taken  by  an  unexperienced  person 
who  undertakes  the  role  of  promoter  that  he  does  not  assume  any 


22  MODERN   BUSINESS    CORPORATIONS. 

liabilities  he  does  not  care  to  assume  through  lack  of  knowledge 
of  what  may  constitute  a  partnership  agreement. 

§  21.  Aiders  and  Abettors  of  a  Fraudulent  Promoter.  Any 
one  who  assists  a  fraudulent  promoter  or  shares  in  the  proceeds 
of  his  fraudulent  scheme  is  liable  with  the  promoter. 

§  22.   Where  to  Incorporate. 

The  corporation  laws  of  the  various  states  are  constantly 
changing,  so  that  it  is  necessary,  in  any  large  or  intricate  busi- 
ness, to  present  the  question  of  where  to  incorporate  to  a  compe- 
tent corporation  lawyer.  If  the  business  is  small  and  simple  it 
is  usual  to  procure  a  charter  from  the  state  wherein  the  business 
operates  and  the  incorporators  live,  unless  the  laws  of  that  state 
are  antagonistic  to  the  purposes  of  the  incorporators.  Busi- 
nesses which  are  large,  with  large  capital  and  intricate  corporate 
purposes,  usually  incorporate  under  one  of  the  states  or  terri- 
tories whose  laws  are  liberalized.  Several  of  the  common- 
wealths may  present  to  a  prospective  corporation  similar  ad- 
vantages in  laws,  or  one  may  offer  some  special  advantage 
which  it  is  desirable  a  particular  company  should  have.  In 
investigating  the  business  corporation  acts  of  a  commonwealth 
under  which  a  company  may  wish  to  incorporate,  some  of  the 
things  one  may  take  note  of  are  the  policy  of  the  commonwealth 
toward  domestic  and  foreign  corporations;  the  statutory  length 
of  life  of  corporations;  legislative  control  over  private  corpora- 
tions; the  corporate  purposes  permitted  in  reference  to  those 
desired ;  amount  of  capitalization  and  the  par  value  of  the  stock 
permitted;  the  amount  of  stock  required  to  be  subscribed  and 
paid  before  beginning  business ;  power  to  issue  preferred  stock ; 
time  within  which  capital  stock  must  be  paid  up;  assessability 
of  stock ;  power  to  create  debts ;  number,  residence  and  qualifica- 
tions of  directors;  whether  all  incorporators  may  be  non-resi- 
dent ;  whether  stockholders'  and  directors'  meetings  must  be  held 
in  the  commonwealth  where  a  charter  is  procured ;  whether  the 
principal  office  may  be  maintained  outside  of  the  commonwealth 
where  the  company  may  be  organized ;  whether  the  corporation 


FORMATION  AND  ORGANIZATION  OF  A  PRIVATE  CORPORATION.      23 

is  allowed  to  hold  stock  in  other  corporations ;  whether  stock  may 
be  issued  legally  in  exchange  for  property  or  services  instead  of 
for  cash ;  whether  the  appraised  value  by  the  board  of  directors 
of  property  or  services  paid  for  by  issuance  of  stock  is  conclusive 
upon  the  creditors  of  the  corporation  who  seek,  in  case  of  in- 
solvency, to  enforce  an  alleged  liability  for  unpaid  stock;  ease 
or  difficulty  with  which  the  charter  may  be  amended ;  publicity 
required  as  to  the  condition  of  a  corporation  organized  under 
the  laws  of  that  state ;  extent  of  stockholders'  and  of  directors'  lia- 
bility ;  whether  there  is  an  inheritance  tax  on  stock,  and  whether 
imposed  on  residents  or  non-residents;  ease  or  difficulty  with 
which  the  corporation  may  be  dissolved;  whether  a  voting  trust 
may  be  created ;  the  amount  of  annual  franchise  tax,  if  any,  and 
other  taxes;  initial  expense.  It  is  well,  also,  at  the  same  time 
to  investigate  the  laws  of  all  states  in  which  the  company  expects 
to  do  business  with  reference  to  the  terms  and  concfitions  under 
which  foreign  corporations  may  do  business  in  them.  Further, 
it  is  sometimes  important  to  incorporate  in  a  state  where  the 
particular  points  of  advantage  of  which  the  incorporating  com- 
pany is  availing  itself  have  come  up  in  litigation  and  have  been 
judicially  sustained.  Adjudicated  laws  have  more  permanence 
than  those  whose  status  has  not  been  determined.  The  tables 
of  incorporation  fees,  taxes,  etc.,  in  the  appendix  are  self-ex- 
planatory and  useful. 

§  23.  Special  Advantages  and  Disadvantages  in  the  Corpora- 
tion Laws  of  the  Liberal  Commonwealths.  Arizona.  Advan- 
tages :  stock  may  be  issued  for  money,  property,  or  services ;  di- 
rectors' meetings  may  be  held  outside  of  territory ;  low  organiza- 
tion fees;  no  annual  existence  franchise  tax.  Disadvantages: 
stockholders'  meetings  must  be  held  in  the  territory ;  laws  unad- 
judicated. 

Connecticut.  Advantages:  stock  may  be  paid  for  in  cash  or 
by  property,  and  judgment  of  directors  is  final  as  to  value  of 
property,  in  absence  of  fraud;  incorporafors  may  be  non-resi- 
dent; no  annual  franchise  tax;  corporations  may  hold  stock 
in  other  corporations.  Disadvantages:  stockholders'  meetings 


24  MODERN   BUSINESS   CORPORATIONS. 

must  be  held  in  the  state;  no  statutory  provision  for  permit- 
ting directors  to  hold  meetings  outside  of  state;  inheritance 
tax  on  stock,  except  where  there  is  no  such  tax  in  the  state  where 
decedent  lives. 

Delaware.  Advantages:  stockholders'  and  directors'  meet- 
ings may  be  held  outside  the  state,  if  provision  is  made  in  the 
by-laws;  stock  may  be  issued  for  services  rendered,  as  well  as 
for  cash  and  property;  incorporators  may  be  non-resident; 
corporations  may  hold  stock  in  other  corporations;  bondholders 
may  be  permitted  to  vote.  Disadvantages:  one  director  must 
live  in  Delaware;  collateral  inheritance  tax  on  stock,  which  ap- 
plies to  residents  and  non-residents ;  annual  franchise  tax. 

District  of  Columbia.  Advantages:  very  small  cost  of  incor- 
porating ;  no  franchise  or*  inheritance  tax.  Disadvantages :  ma- 
jority of  trustees  (correspond  to  directors)  must  live  in  the 
district;  cannot  issue  stock  for  service;  ten  per  cent,  of  capital 
stock  must  be  paid  in  before  beginning  business ;  annual  reports 
to  be  filed  and  published,  and  shall  include  amount  of  capital 
paid  in  and  amount  of  existing  debts;  corporations  cannot  buy 
stock  in  other  corporations;  corporations  organized  under  this 
law  cannot  sue  in  the  federal  courts,  not  being  citizens  of  any 
state ;  laws  unadjudicated. 

Maine.  Advantages:  stock  may  be  issued  for  services,  prop- 
erty, or  cash,  and  judgment  of  directors  is  conclusive  as  to  value 
in  absence  of  fraud ;  incorporators  and  directors  may  be  non-resi- 
dent ;  directors'  meetings  may  be  held  outside  of  state ;  corpora- 
tions may  acquire  stock  in  other  corporations ;  low  organization 
fee.  Disadvantages :  stockholders'  meetings  must  be  held  in  the 
state;  collateral  inheritance  tax;  small  existence  franchise  tax. 

Massachusetts.  Advantages:  incorporators  and  directors  may 
be  non-resident ;  directors  may  meet  outside  of  state  ;  stock  may 
be  issued  for  services,  property  or  cash.  Disadvantages:  stock- 
holders' meetings  must  be  held  in  the  state ;  no  authority  to  cor- 
porations to  hold  stock  in  other  corporations ;  detailed  annual 
report  required ;  collateral  inheritance  tax. 

Nevada.  Advantages :  incorporators  and  directors  may  be  non- 
resident ;  stockholders'  and  directors'  meetings  may  be  held  out- 


FORMATION  AND  ORGANIZATION  OF  A  PRIVATE  CORPORATION.      25 

side  of  the  state ;  stock  may  be  issued  for  property,  services,  or 
cash,  and  judgment  of  directors  is  conclusive,  etc.;  no  inherit- 
ance tax ;  action  of  majority  of  stockholders  or  directors  may  be 
valid  without  regular  meeting;  bondholders  may  be  given  the 
right  to  vote;  cumulative  voting  allowed;  no  annual  franchise 
tax  (except  retaliatory  tax) ;  low  organization  fees.  Disadvan- 
tages :  No  particularly  undesirable  provisions. 

New  Jersey.  Advantages :  incorporators  may  be  non-resident ; 
stock  may  be  issued  for  property  or  cash,  and  judgment  of  direc- 
tors is  conclusive,  etc. ;  directors'  meetings  may  be  held  outside 
of  the  state,  if  by-laws  so  provide;  corporations  may  hold  stock 
in  other  corporations ;  cumulative  voting  permitted ;  voting  trust 
may  be  created;  laws  well  adjudicated.  Disadvantages:  stock- 
holders' meetings  must  be  held  in  the  state;  one  director  must 
live  in  the  state ;  annual  franchise  tax ;  collateral  inheritance  tax 
(does  not  apply  to  non-residents)  ;  annual  franchise  tax. 

New  York.  Advantages :  stock  may  be  issued  for  labor,  prop- 
erty, or  cash,  and  judgment  of  directors  is  conclusive,  etc. ;  direc- 
tors' meetings  may  be  held  outside  of  state;  corporations  may 
hold  stock  in  other  corporations;  cumulative  voting  permitted; 
voting  trust  may  be  created;  laws  well  adjudicated.  Disadvan- 
tages :  stockholders'  meetings  must  be  held  in  the  state ;  one  in- 
corporator  and  one  director  must  reside  in  the  state ;  one-half  of 
the  capital  stock  must  be  paid  in  within  a  year  from  incorpora- 
tion ;  exacting  reports,  on  request ;  detailed  books  of  account  of 
business  required ;  direct  and  cumulative  inheritance  tax ;  there 
may  be  disadvantages  in  the  income  franchise  tax  in  specific  in- 
stances. 

South  Dakota.  Advantages :  stockholders'  and  directors'  meet- 
ings may  be  held  outside  of  the  state;  stock  may  be  issued  for 
cash,  services,  or  property ;  no  annual  existence  franchise  tax ;  no 
inheritance  tax ;  cumulative  voting  permitted ;  low  incorporation 
fees.  Disadvantages :  one-third  of  the  incorporators  must  reside 
in  the  state ;  corporations  have  no  authority  to  hold  stock  in  other 
corporations ;  detailed  record  of  business  transactions  and  reports 
of  meetings  of  stockholders  and  directors,  embracing  all  acts 
done  and  ordered  to  be  done,  must  be  kept  in  corporation  office, 


26  MODERN   BUSINESS   CORPORATIONS. 

and  be  open  to  inspection  of  creditors ;  published  annual  reports 
of  indebtedness  due  to  and  by  the  corporation,  number  and 
amount  of  dividends  paid,  and  net  amount  of  profits ;  life  of  cor- 
poration but  twenty  years. 

Virginia.  Advantages:  incorporators  and  directors  may  be 
non-resident ;  stock  may  be  issued  for  cash,  services,  or  property, 
and  judgment  of  directors  is  conclusive,  etc. ;  directors'  meetings 
may  be  held  outside  of  the  state ;  corporations  may  hold  stock  in 
other  corporations ;  cumulative  voting  allowed ;  bondholders  may 
be  given  right  to  vote;  no  books  required  in  state.  Disadvan- 
tages :  annual  meetings  of  stockholders  must  be  held  in  the  state ; 
collateral  inheritance  tax  on  stock. 

West  Virginia.  Advantages :  stockholders'  and  directors'  meet- 
ings may  be  held  outside  of  the  state ;  incorporators  and  directors 
may  be  non-resident ;  stock  may  be  issued  for  services,  property, 
or  cash,  and  judgment  of  directors  is  conclusive,  etc. ;  corpora- 
tions may  hold  stock  in  other  corporations ;  no  books  required  to 
be  kept  in  the  state ;  cumulative  voting  allowed ;  action  of  major- 
ity of  directors  may  be  valid  without  calling  a  regular  meeting 
of  the  board.  Disadvantages :  ten  per  cent,  of  the  amount  sub- 
scribed by  each  incorporator  must  be  paid  in  before  signing  the 
articles  of  association ;  collateral  inheritance  tax  on  stock. 

New  Mexico.  Advantages :  directors  may  meet  outside  of  ter- 
ritory ;  no  stockholders'  liability  for  unpaid  stock,  provided  a  cer- 
tificate to  that  effect  is  filed  with  articles  and  the  fact  is  published 
as  provided — except  as  to  the  stock  with  which  the  corporation 
commences  business;  directors  may  make  assessments  on  shares 
till  par  value  shall  have  been  paid ;  cumulative  voting  for  direc- 
tors is  permitted;  corporations  may  hold  stocks  and  bonds  of 
other  corporations ;  stock  may  be  issued  for  property  purchased, 
and  certain  corporations  may  take  stock  and  bonds  in  other  cor- 
porations in  payment  for  labor  and  materials ;  "any  corporation 
which  shall  have  more  than  one  kind  of  stock,  may,  by  so  provid- 
ing in  its  certificate  of  incorporation,  confer  the  right  to  choose 
the  directors  of  any  class  [with  respect  to  the  time  for  which 
they  shall  serve]  upon  the  stockholders  of  any  class  or  classes,  to 
the  exclusion  of  the  others" ;  no  annual  franchise  tax,  etc.  Dis- 


FORMATION  AND  ORGANIZATION  OF  A  PRIVATE  CORPORATION.      27 

advantages:  one  director  in  New  Mexico  required;  stock  and 
transfer  books  required  to  be  kept  in  territory ;  minimum  capital 
stock,  $2,000 ;  stockholders'  meetings  required  to  be  held  in  regis- 
tered office  in  the  territory — but  may  be  held  by  agent  through 
proxies.  This  act  (approved  March  15,  1905)  was  copied  in 
general  from  the  New  Jersey  laws.  Filing  fees  are  about  one- 
half  those  in  New  Jersey. 

Porto  Kico,  also,  has  a  liberal  incorporation  law  based  on  the 
New  Jersey  code. 

§  24.   Relation  to  the  Creating  State  of  a  Corporation  Whose 
Principal  Office  and  Business  are  Located  in  a  Foreign  State. 

The  legal  side  of  this  subject  has  already  been  touched  upon. 
A  corporation  is  governed  by  the  laws  of  the  state  which  creates 
it,  but  is  subject  to  the  legal  restrictions  of  the  states  where  it 
does  business.  In  order  that  the  parent  state  may  continue  to 
exercise  jurisdiction  over  its  corporations,  they  are  usually 
obliged  to  maintain  in  that  state  an  office  where,  and  a  resident 
agent  upon  whom,  process  may  be  served.  "Where  a  resident  di- 
rector is  necessary  under  the  law,  process  may  be  served  on  him. 
In  some  of  the  states  where  there  are  such  requirements  as  these, 
certain  persons  make  a  business  of  acting  as  resident  agent  or 
director  for  domestic  corporations  whose  principal  business  office 
and  manufacturing  or  other  kind  of  plant  or  business  is  located 
in  a  foreign  state.  Certain  "trust  companies,"  organized  for  this 
particular  service,  furnish  their  place  of  business  as  the  resident 
office  of  such  corporations  and  designate  some  member  of  their 
company  as  the  resident  agent  or  director,  charging  a  yearly  fee 
of  about  ten  dollars.  The  office  maintained  in  the  creating  state 
is  the  domiciliary  office  of  the  corporation  in  the  sense  that  it  is 
the  parental  home  office,  though  not  any  of  the  actual  commer- 
cial business  of  the  corporation  may  be  conducted  from  it.  In 
those  parent  states  where  stockholders'  meetings  are  required  to 
be  held  within  the  boundaries  of  the  state,  stockholders'  meetings 
may  be  held  in  the  domiciliary  office.  Otherwise  the  office  may 
be  of  no  use  except  as  a  place  designated  to  the  secretary  of  state 


28  MODERN"   BUSINESS   CORPORATIONS. 

where  a  summons  may  be  served.  If  a  portion  of  the  business  of 
the  corporation  is  transacted  in  the  parent  state,  the  business 
office  of  the  corporation  will  serve  every  purpose,  provided  there 
is  a  resident  agent  connected  with  it.  Some  states  require  that 
correct  books  of  account  of  business  transactions  and  a  book  con- 
taining an  up-to-date  list  of  stockholders,  their  residence,  and 
their  number  of  shares,  listed  severally,  shall  be  kept  at  the  office 
in  the  parent  state;  that  the  corporation  shall  report  annually 
such  items  as  the  amount  of  capital  stock  and  the  proportion 
actually  issued;  how  much  was  paid  in  cash,  how  much  other- 
wise, and  in  what  way ;  the  amount  of  debts,  and  of  assets ;  the 
amount  of  dividends  made,  declared,  and  paid;  the  amount  of 
capital  employed  or  represented  in  the  state,  etc.  Such  non- 
resident domestic  corporations,  organized  under  the  laws  of  the 
liberal  states,  pay  an  existence  franchise  tax  and  may  in  addition 
be  taxed  on  the  capital  represented  by  property  located  and  busi- 
ness transacted  in  the  state.  So  far  as  the  capital  represented 
by  the  business  transacted  is  concerned,  however,  the  liberal 
states  have  not  generally  exercised  their  right  to  impose  a  tax 
thereon  in  the  case  of  non-resident  domestic  business  corpora- 
tions. Railway,  insurance,  banking,  and  other  transportation  and 
financial  corporations  are  taxed  according  to  special  statutes.  The 
expression,  "existence"  franchise  tax,  a  tax  paid  to  maintain  the 
right  of  existence,  is  used  to  distinguish  the  tax  placed  by  the  par- 
ent state  on  domestic  corporations  from  the  business  franchise 
tax,  or  license  tax,  placed  on  foreign  corporations  by  foreign 
states,  by  payment  of  which  tax  the  corporations  maintain  the 
right  to  do  business  in  the  foreign  states. 

§  25.    A  Corporation's  Relation  to  Foreign  States. 

A  foreign  state  is  any  state  other  than  the  one  under  whose 
laws  a  corporation  is  formed.  Since  a  corporation  can  have  no 
legal  existence  outside  the  boundaries  of  the  state  in  which  it 
was  created,  it  can  exercise  none  of  its  business  functions  or 
privileges  in  any  other  states  except  through  the  courtesy  and 
consent  of  the  other  states.  The  "rule  of  comity"  is  the  prevailing 


FORMATION  AND  ORGANIZATION  OF  A  PRIVATE  CORPORATION.      29 

courteous  and  consenting  recognition  of  corporations  foreign 
to  the  state  in  which  they  are  exercising  a  right  to  do  business. 
The  rule  of  comity  is  part  of  the  common  law  and  is  binding 
except  where  modified  by  the  statutory  law  of  the  several  states. 
Subject  to  the  limitations  imposed  by  the  national  constitution, 
a  state  may  prescribe  any  conditions  upon  which  a  foreign  cor- 
poration may  do  business  within  its  territory.  Most  of  the  states 
have  put  a  statutory  limitation  on  this  rule  for  the  protection 
of  their  citizens  from  the  acts  of  irresponsible  foreign  corpora- 
tions and  for  the  purpose  of  raising  revenue  for  granting  the 
right  to  do  business.  The  kind  of  business  referred  to  is  the  com- 
mercial business  out  of  which  a  corporation  makes  its  profit  and 
not  those  acts  which  the  stockholders  or  corporators  perform  in 
creating  or  maintaining  the  corporate  existence.  Where  a  com- 
pany maintains  an  agency  or  warehouse  and  sells  goods  in  a  for- 
eign state,  it  is  considered  as  doing  business  in  that  state.  Part 
of  the  corporate  assets  are  represented  in  the  state,  materially 
in  the  case  of  manufacturing  and  mercantile  corporations,  and 
by  business  transacted  and  protected  in  the  case  of  insurance  and 
other  financial  companies.  The  mere  taking  orders  for  goods  by 
a  traveling  salesman,  or  isolated  and  largely  fortuitous  transac- 
tions of  business  without  the  intention  of  continuing  business, 
do  not  constitute  "doing  business"  in  the  legal  sense.  Where, 
however,  a  traveling  salesman  carries  articles  which  he  sells 
direct,  without  referring  an  order  to  the  home  office  to  be  filled, 
that  act  comes  within  the  meaning  of  "doing  business."  Some- 
times the  business  is  such  that  a  state  requires  that  the  foreign 
corporation  shall  maintain  an  office  in  the  state  and  provide  an 
agent  or  agents  upon  whom  process  may  be  served.  The  object 
of  requiring  a  resident  agent  is  to  bring  the  corporation  within 
the  jurisdiction  of  the  staFe  in  which  it  is  seeking  to  do  business, 
so  that  it  may  sue  and  be  sued  there.  The  object  of  requiring 
an  office  is  that  a  place  may  be  furnished  where  the  agent  may 
be  found  and  where  a  summons  may  be  served  on  him.  These 
provisions  facilitate  legal  actions  against  a  foreign  corporation, 
which  might  otherwise  be  able  to  make  the  service  of  process 
extremely  difficult.  It  is  provided  that  corporations  may  have 


30  MODERN   BUSINESS   CORPORATIONS. 

license  to  do  business  upon  compliance  with  certain  conditions. 
The  laws  of  the  states  are  not  uniform  in  their  treatment  of  for- 
eign corporations.  Progressive  legislation  is  in  the  direction  of 
imposing  on  foreign  corporations  the  same  restraints  and  qualifi^ 
cations  for  business  that  apply  to  domestic  corporations.  Justice 
to  domestic  corporations  demands  this.  Among  the  qualifica- 
tions necessary  in  one  or  more  states  are  that  a  certified  copy  of 
the  articles  of  incorporation  and  the  by-laws,  and  a  list  of  names 
and  residences  of  the  officers  and  directors,  the  location  of  the 
domiciliary  or  principal  office,  the  date  of  the  annual  meeting 
and  meeting  for  election  of  officers  and  directors,  shall  be  filed 
with  the  secretary  of  state,  or  other  proper  state  or  county  officer ; 
that  a  statement  shall  be  made  of  the  capital  stock  paid  in  in 
cash,  and  of  that  otherwise  paid  in,  and  how  it  was  paid,  and  the 
capital  represented  in  the  state  by  corporate  property  located  and 
by  business  transacted  in  the  state ;  that  an  annual  report  shall 
be  made  which  shall  include  the  amount  of  debts,  or  an  amount 
which  they  do  not  exceed,  the  amount  of  assets,  or  an  amount 
which  they  at  least  equal,  and  the  amount  of  dividends  declared 
or  paid;  that  any  substantial  changes  in  any  of  the  foregoing 
shall  be  reported  to  the  secretary  of  state;  that  the  books  of  ac- 
count of  business  transacted  by  the  corporation  shall  be  kept  at 
the  state  office  or  be  forthcoming  from  it  (seldom)  ;  that  a  stock- 
book,  with  complete  information  as  to  stockholders  and  stock, 
must  be  kept  at  the  corporation's  office  or  at  the  office  of  a  transfer 
agent  in  the  state,  and  that  the  book  shall  be  open  to  inspection  by 
any  stockholder,  judgment  creditor,  or  authorized  officer  of  the 
law ;  that  a  resident  agent  shall  be  appointed  and  that  an  authen- 
ticated copy  of  his  appointment  and  of  his  acceptance  and  a  cer- 
tificate of  the  location  of  his  residence  or  office  shall  be  filed  with 
the  secretary  of  state  or  other  proper  officer ;  that  certain  sundry 
fees  or  other  qualifying  fees  shall  be  paid,  and  also  annual  taxes 
on  the  amount  of  corporate  property  or  capital  represented  by  cor- 
porate property  located  and  business  transacted  in  the  state,  or 
on  some  other  basis ;  that  a  corporation  cannot  transact  business 
in  the  state  nor  sue  without  having  obtained  a  certificate  of  au- 
thority to  do  business.  Some  states  have  passed  what  are  known 


FORMATION"  AND  ORGANIZATION  OF  A  PRIVATE  CORPORATION.      31 

as  retaliatory  statutes,  which  provide  that  foreign  corporations 
seeking  to  do  business  in  the  territory  of  those  states  shall  pay 
the  same  fees  and  taxes  and  comply  with  the  same  conditions 
that  the  domestic  corporations  of  those  states  would  be  required 
to  meet  in  the  domiciliary  states  (the  states  under  whose  laws 
corporations  are  created)  of  those  foreign  corporations.  Some 
states  provide  that  a  foreign  corporation  shall  appoint  in  writ- 
ing their  secretaries  of  state  or  commissioners  of  corporations 
attorneys  upon  whom  process  may  be  served,  dispensing  with  the 
necessity  of  any  other  agent.  The  fractional  proportion  of  capi- 
tal represented  by  property  located  in  a  foreign  state  and  by  the 
business  transacted  there,  where  that  is  the  basis  on  which  in- 
corporation fees  are  based,  may  be  computed  by  taking  the  busi- 
ness in  that  state  in  a  given  period,  plus  the  property  located 
therein,  as  a  numerator,  and  the  entire  business  of  the  company 
for  the  same  period  plus  the  entire  property,  as  a  denominator. 
The  fraction  represents  the  proportion  of  the  capital  stock  on 
which  incorporation  fees  or  taxes  must  be  paid  in  that  state.  If 
all  the  business  of  a  company  is  transacted  in  a  foreign  state, 
the  entire  capital  stock  will  form  the  basis  for  charging  fees. 

§26.    Capitalization:   Definition. 

(1)  In  a  general  sense,  the  capitalization  of  a  corporation 
means  the  par,  or  face,  value  of  all  the  stocks,  common  and  pre- 
ferred, which  it  has  been  authorized  to  issue,  and  of  the  bonds 
which  are  issuable;.  that  is,  all  the  apparent  funding  resources 
of  the  corporation.  (2)  But  in  a  stricter  sense,  it  is  all  the 
actual  capital  realized  from  the  sale  of  stocks  and  bonds,  the 
capital  with  which  the  corporation  equips  itself  for  business  and 
which  it  uses  in  operating.  Thus,  a  company  capitalized  for 
$1,000,000  may  sell  all  its  securities,  stocks  and  bonds,  at  such 
prices  that  the  average  price  will  be  but  sixty  cents  on  the  dollar 
of  nominal  capitalization.  It  will  thus  have  for  equipping  and 
operating  $600,000  instead  of  $1,000,000.  Or,  it  may  sell 
$800,000  of  securities  at  par  and  keep  $200,000  of  stock  unis- 
sued, or  turn  it  into  treasury  stock.  It  still  has  a  nominal  capi- 


32  MODERN"   BUSINESS    CORPORATIONS. 

talization  of  $1,000,000  but  an  actual  capital  of  only  $800,000. 
(3)  In  the  statutory  sense,  when  referring  to  the  provision  for 
a  certain  amount  of  capitalization  in  the  articles  of  association,  it 
means  the  amount  of  stock  authorized  to  be  issued,  all  of  which 
amount  may  or  may  not  be  subscribed.  Bonds  are  not  mentioned 
in  articles  of  association,  except  when  the  amount  of  bonded  in- 
debtedness is  limited  by  statute.  (4)  Or  capitalization  is  all 
the  actual  property  of  the  corporation.  This  is  the  definition 
used  in  tax  statutes.  (5)  In  yet  another  sense  ft  is  the  par 
value  of  all  the  stocks  and  bonds  issued,  which  is  the  amount 
of  accountability  acknowledged  by  a  corporation.  This  is  the 
definition  generally  accepted  in  financial  practice.  (6)  In  a 
legal  sense,  however,  the  bonds  are  not  included  in  the  capitali- 
zation, but  are  regarded  in  their  true  light  of  debt  owing  by  the 
corporation.  Capitalization,  in  the  customary  judicial  interpre- 
tation, represents  the  joint  and  several  interests  of  the  stockhold- 
ers in  the  corporation,  and  so  far  it  is  synonymous  with  capital 
stock,  and  is,  when  the  corporation  is  new  and  without  losses 
or  profits,  the  amount  paid  in,  or  subscribed  to  be  paid  in,  by 
the  subscribers  to  stock,  either  to  forward  the  corporate  business 
or  to  satisfy  creditors  of  the  corporation.  When  the  corporation 
has  been  doing  business  for  some  time,  the  term  is  sometimes 
modified  to  mean  the  sums  paid  in,  or  to  be  paid  in  by  sub- 
scribers, with  the  addition  of  all  profits  and  gains  and  the  sub- 
traction of  all  losses  and  depreciations.  Then  the  term  is  syn- 
onymous with  "capital."  In  discussing  corporate  finance,  the 
word  will  be  used  in  the  fifth  sense,  while  in  referring  lo  the 
statutory  provision  of  capital  stock  in  the  articles  of  association, 
the  word  will  be  used  in  the  third  sense. 

§  27.   Determining  the  Amount  of  Capitalization. 

The  amount  of  capitalization  of  a  corporation  is  one  of  the 
chief  things  to  be  determined  precedent  to  filing  a  charter.  When 
a  professional  promoter  organizes  a  corporation,  he  has  his  plans 
so  carefully  made  that  he  knows  exactly  what  the  capitalization 
should  be.  Unprofessional  organizers  should  know  as  much  and 


FORMATION  AND  ORGANIZATION  OF  A  PRIVATE  CORPORATION.      33 

should  have  their  knowledge  based  on  reliable  figures.     It  is 
necessary  to  the  later  financial  stability  of  the  corporation. 

In  the  first  place,  unless  the  stock  and  bonds  of  a  corporation 
are  sold  at  a  premium,  the  par  value  of  all  the  securities  repre- 
sented in  the  total  capitalization  must  equal  the  amount  of  money 
required  to  be  invested  in  the  real  estate  and  plant  of  the  corpo- 
ration, and  part,  if  not  all,  of  the  running  capital.  Usually  part 
of  the  running  capital  is  borrowed  from  a  bank,  unless  bonds 
can  be  sold  which  bear  a  lower  rate  of  interest  than  would  be 
necessary  to  pay  the  bank.  When  it  is  possible  to  provide  part 
of  the  running  capital  through  the  sale  of  commercial  paper,  as 
may  usually  be  done,  it  will  often  be  found  profitable  to  do  so. 
Thomas  L.  Greene  says:  "With  few  exceptions,  where  firms 
[or  companies]  have  command  of  practically  unlimited  sums  of 
their  own,  business  success  is  possible  only  through  the  aid  of 
the  money  lender.  Let  us  suppose,  for  illustration,  that  a  firm 
employs  a  capital  of  $1,000,000  in  its  business,  one  half  of  which 
it  borrows  from  the  banks  on  its  commercial  paper  at  six  per 
cent,  interest.  We  will  suppose  also  that  the  firm  'turns  its 
capital  over'  six  times  a  year,  which  is  only  another  way  of 
saying  that  its  volume  of  annual  sales  is  six  times  the  capital. 
Assuming  that  our  firm  is  enabled  to  earn  two  per  cent,  net 
upon  its  sales,  the  resulting  profits,  $120,000,  amount  to  twelve 
per  cent,  upon  the  capital  employed.  As  under  our  assumption 
the  firm  is  paying  six  per  cent,  on  the  amount  borrowed,  or 
$30,000  yearly,  it  follows  that  the  actual  earnings  upon  the 
firm's  own  capital  are  $90,000,  or  eighteen  per  cent.,  a  handsome 
return  made  possibly  only  through  the  borrowing  of  money 
which  can  be  used  to  extend  the  volume  of  trade  and  to  earn 
something  for  the  firm  over  and  above  the  percentum  of  interest 
paid.  The  actual  profits  earned  under  this  system  vary  in  differ- 
ent trades,  though  usually  the  volume  of  business  is  in  inverse 
proportion  to  the  percentage  of  profit  on  the  annual  sales.  What- 
ever sum  we  select  or  whatever  earnings  we  assume,  the  principle 
underlying  the  illustration  is  the  same.  Of  course  a  part  of  the 
capital  of  such  firm  or  corporation  in  business  must  be  invested 
MOD.  Bus.  CORP.— 3 


34:  MODERN    BUSINESS    CORPORATIONS. 

in  credits  granted  to  customers  and  in  some  form  of  merchan- 
dise in  stock."  The  amount  the  company  can  borrow  is  the 
amount  of  its  credit,  based  on  the  value  of  the  company's  prop- 
erty at  forced  sale,  the  value  of  the  property  in  which  the  money 
borrowed  is  to  be  invested,  and  the  business  reputation  of  the 
proprietors  and  managers  of  the  company.  "To  borrow  one-half 
of  one's  necessary  capital,  in  money  or  goods,  is  common,"  says 
Mr.  Greene.  The  amount  of  credit  a  company  deserves  is  the 
problem  of  commercial  banking.  Corporations  just  starting  in 
business  cannot  usually  command  as  large  credit  as  old  estab- 
lished businesses.  The  most  conservative  banks  give  preference 
in  discounts  to. paper  based  on  actual  commercial  transactions, 
over  that  secured  by  stationary  capital.  The  most  important 
function  of  a  commercial  bank  is,  by  the  use  of  the  capital  it 
controls,  "to  bridge  over  the  periods  of  credit  which  necessarily 
intervene  between  production  and  consumption,  in  such  a  man- 
ner as  to  give  back  to  each  producer,  or  middleman,  as  quickly 
as  possible,  the  capital  invested  by  him  in  such  products  in  order 
that  he  may  use  it  over  again  in  new  production  and  new  pur- 
chases." From  these  suggestions  one  may  guess  approximately 
the  amount  of  money  a  company  should  be  able  to  borrow  on 
commercial  paper,  taking  into  consideration  local  financial  con- 
ditions. The  commercial  paper  of  established  concerns  is  fre- 
quently floated  over  the  country  among  banks  through  the  agency 
of  brokers  in  commercial  paper. 

The  proper  amount  of  capitalization,  in  the  sense  in  which  it 
includes  bonds,  is  determined  with  reference  to  the  net  earning 
capacity  of  the  future  corporation.  The  average  per  cent,  of  net 
earnings  of  a  period  of  years,  calculated  from  the  experience  of 
other  companies  in  the  same  line  of  business,  but  with  reference 
to  its  own  output,  may  be  taken  as  a  basis,  thus  allowing  for 
years  of  low  prices  or  slack  demand ;  or  a  more  conservative  esti- 
mate of  earnings  may  be  made  altogether  on  the  basis  of  the 
off  years  in  price  or  demand,  thus  putting  the  company  in  a 
position  where  it  can  meet  its  interest  obligations  without  ques- 
tion. If  the  company  to  be  organized  has  special  advantages  over 
others  in  the  same  line  of  manufacture,  advantages  which  will 


FORMATION  AND  ORGANIZATION  OF  A  PRIVATE  CORPORATION.      35 

increase  the  average  of  its  net  earnings,  these  also  should  be 
taken  into  account  at  a  conservative  figure.  Likewise,  disadvan- 
tages, if  there  are  any,  should  be  estimated  and  deducted.  After 
calculating  the  amount  of  net  profit,  provision  should  be  made 
out  of  it  for  a  reserve  fund  for  the  purpose  of  extending,  repair- 
ing, and  improving  the  equipment  of  the  company,  for  invest- 
ment in  high  class  bonds  which  can  be  pledged  as  collateral  for 
the  raising  of  funds  when  money  is  scarce,  or  for  use  in  forward- 
ing the  "integrating"  process  by  buying  into  companies  which 
produce  materials  to  be  used  by  this  company,  or  in  obtaining 
favorable  connections  for  controlling  trade  by  obtaining  inter- 
ests in  other  companies  of  the  same  kind.  A  -careful  business 
policy  would  require  in  a  manufacturing  concern  a  reserve  of 
from  forty  to  fifty  per  cent,  of  the  net  profits.  An  average  an- 
nual reserve  of  at  least  fifty  per  cent,  of  the  net  profits  for  use 
in  one  or  all  these  ways  will  put  a  company  on  a  much  safer 
competitive  footing  and  thereby  assure  a  much  greater  stability 
to  the  investment  value  of  its  stock.  So,  in  figuring  the  capitali- 
zation, and  particularly  in  connection  with  the  interest  on  bonds 
and  the  dividends  on  cumulative  preferred  stock,  not  only  the 
net  profits  should  be  considered,  but  also  the  policy  with  respect 
to  reserves.  The  capitalization,  therefore,  should  be  placed  at 
whatever  figure  the  net  profits,  minus  the  reserve,  will  permit, 
figuring  the  amount  of  interest  to  be  paid  on  bonds  and  the 
amount  of  dividends  to  be  paid  on  preferred  stock  and  estimating 
a  fair  dividend  for  the  common  stock.  Then,  as  the  earnings 
increase,  the  capitalization  may  be  increased  from  time  to  time, 
or  the  bonded  indebtedness  may  be  increased.  As  to  the  amount 
of  common  stock,  particular  consideration  should  be  taken  of  the 
fluctuations  in  profits  of  the  business,  so  that  the  issue  of  com- 
mon stock  shall  be  conservative.  It  is  better  that  large  divi- 
dends shall  be  paid  in  prosperous  years  on  a  conservative  com- 
mon issue  than  that  the  company  shall  be  so  highly  capitalized 
that  in  poor  years  the  common  shall  receive  little  or  no  divi- 
dends. The  end  sought  in  capitalizing  should  be  to  make  the 
market  value  of  the  stocks  and  bonds  correspond  as  nearly  as 
may  be  with  their  par  value.  The  worth  of  the  corporation, 


36  MODERN   BUSINESS   CORPORATIONS. 

measured  by  its  earning  capacity,  should  correspond  to  the  com- 
bined par  value  of  its  stocks  and  bonds.  This  is  the  ideal  and 
comparatively  practicable  condition.*  Where  this  is  not  the  case, 
a  company  is  either  over-capitalized  or  under-capitalized.  Where 

*  There  seems  to  be  a  tendency  on  the  part  of  the  public  to  limit 
the  amount  of  capital  oft  a  corporation  that  is  justly  entitled  to 
profits.  Professor  Emory  Johnson,  in  American  Railway  Transpor- 
tation, points  out  that  the  earning  capacity  of  a  corporation  cannot 
equitably  or  logically  be  made  the  sole  criterion  of  value.  To  de- 
termine how  much  capital  is  justly  entitled  to  profits  (a  social 
question  the  genesis  and  development  of  which  will  not  be  here 
discussed),  Professor  Johnson  says  the  cost  of  reproduction  of  the 
corporate  property  and  the  earning  capacity  must  be  considered  to- 
gether. "Definite  rules  for  applying  this  method  were  worked  out 
by  a  state  tax  commission  in  Michigan  in  1900.  In  determining 
the  value  of  the  physical  properties  of  the  railroad — its  roadbed, 
rolling  stock,  terminals,  etc. — the  cost  of  duplication  was  made  the 
basis  of  valuation.  The  railroad  company's  franchise,  the  special 
concessions  granted  to  it  by  public  authority,  and  the  special  com- 
mercial opportunities  upon  which  its  business  depended — that  is  to 
say,  all  the  non-physical  or  immaterial  elements  of  its  property — 
were  valued  in  accordance  with  their  earning  capacity.  To  ascer- 
tain the  value  attributed  to  these  non-physical  properties  a  method 
suggested  by  Professor  Henry  C.  Adams  was  followed.  According 
to  the  method  devised  by  Professor  Adams,  the  value  of  these  imma- 
terial properties  was  determined  (1)  by  deducting  aggregate  ex- 
penses of  operation  from  gross  earnings  and  adding  the  income 
from  corporate  investments;  (2)  by  deducting  from  the  total  in- 
come thus  obtained  an  amount  properly  chargeable  to  capital — 
that  is,  a  certain  per  cent,  on  the  appraised  value  of  the  physical 
properties — rents  paid  for  the  lease  of  property  operated,  and  per- 
manent improvements  charged  directly  to  income;  (3)  by  capitaliz- 
ing the  remainder  at  a  certain  rate  of  interest.  This  method  of 
valuation  gives  a  basis  for  capitalization  that  seems  to  be  equitable 
to  all  parties  in  interest — the  public,  the  investor  and  the  company." 
There  are  probably  conservative  corporations  that  will  desire,  in 
capitalizing,  to  take  into  consideration  this  tendency  on  the  part 
of  the  public  to  hold  corporations  to  more  strict  accountability  for 
the  value  of  property  on  the  basis  of  earnings  when  considering  the 
amount  to  be  paid  in  taxes.  Deducting  the  larger  taxes  would,  of 
course,  leave  a  smaller  net  profit  from  which  to  pay  dividends  and 
interest  and  would  tend  to  reduce  the  capitalization. 


FORMATION  AND  ORGANIZATION  OF  A  PRIVATE  CORPORATION.       37 

the  combined  par  value  of  all  the  stocks  and  bonds  of  a  corpora- 
tion is  greater  than  their  market  value  based  on  profits,  the  cor- 
poration is  over-capitalized.  Where  the  value  of  a  corporation's 
assets  exceeds  the  par  value  of  its  securities,  the  corporation  is 
under-capitalized.  There  are  decided  disadvantages  attached  to 
an  extreme  case  of  either  condition. 

In  over-capitalization  the  difference  between  the  face  and 
market  values  of  a  company's  securities  represents  the  amount  of 
over-capitalization,  or  "water."  Extreme  over-capitalization  is 
a  strong  invitation  to  competition,  if  the  over-capitalized  com- 
pany can  pay  dividends  on  its  watered  stock.  It  is  an  announce- 
ment to  those  having  capital  to  invest  that  there  is  "big"  money 
in  the  business  and  that  another  company  capitalized  at  a  proper 
figure  can«earn  a  large  return  on  the  investment.  Moreover, 
since  the  over-capitalized  company  has  the  interest  on  bonds  and 
dividends  on  preferred  stock  to  meet,  it  must  maintain  prices 
and  will  thus  insure  a  greater  steadiness  in  the  market  so  far 
as  its  particular  influence  extends.  Its  competitors,  of  course, 
share  in  the  advantages  of  stable  prices.  Besides,  economic  con- 
ditions may  be  such  in  certain  years  that  an  over-capitalized 
company  cannot  meet  its  interest  and  dividend  charges,  and  then 
it  is  in  danger  of  a  receivership  and,  perhaps,  of  dissolution. 
But,  on  the  other  hand,  in  order  that  the  ideal  condition  may  be 
approximated  without  the  constant  change  and  expense  incident 
to  recapitalization,  in  starting  a  company  prospective  increase 
in  earning  capacity  must  be  taken  into  account,  and  a  reasonable 
present  over-capitalization  be  provided  on  the  basis  of  the  proba- 
ble larger  net  earnings  of  the  next  few  years  in  order  to  keep  the 
securities  of  the  company  from  selling  at  a  premium  proportion- 
ate to  that  increase  in  earnings. 

In  general,  as  was  said,  it  is  desirable  that  an  investment  stock 
remain  near  par.  Such  a  stock  is  better  for  investment  purposes 
than  one  that  commands  a  large  premium  in  the  market.  There 
is  always  the  possibility  of  unforeseen  vicissitudes,  such  as  com- 
petition, waning  or  greatly  variable  demand,  and  unfavorable 
legislation,  which  affect  the  profits  of  a  company  and  cause  the 
stock  to  fluctuate  greatly  in  market  value.  The  greatest  degree 


38  MODERN   BUSINESS    CORPORATIONS. 

I 

of  fluctuation  naturally  takes  place  in  those  stocks  which  com- 
mand the  greatest  premium  on  the  oasis  of  earnings,  or  in  those 
stocks  which  are  held  in  so  few  hands  that  the  "outsiders/' 
small  holders  and  speculators,  may  suspect  manipulation  on  the 
part  of  the  "insiders,"  those  who  hold  the  controlling  interest 
in  the  capital  stock  and  thereby  control  prices,  and  throw  their 
stock  on  the  market  and  perhaps  cause  a  market  panic  with  its 
not  unusual  collapse  in  prices.  A  stock  which  is  kept  near  par 
will  usually  be  more  widely  distributed  than  one  which  com- 
mands a  large  premium.  The  reason  is  that  a  stock  that  com- 
mands a  premium  of  several  hundred  per  cent,  is  not  so  readily 
marketable.  If  a  person  has  $50,000  to  invest,  he  will  prefer 
to  buy  500  shares  of  a  stock  at  par,  or  a  proportional  number  of 
shares  at  a  little  more  than  par,  than  to  pay  a  premium  of  four 
hundred  per  cent.,  making  a  price  of  five  hundred,  and  get  only 
one  hundred  shares.  He  can  get  stocks  and  bonds  of  satisfactory 
security  which,  for  one  reason  or  another,  promise  good  dividends 
or  pay  good  interest  and  which  offer  opportunity  for  increase  in 
value  without  being  subjected  to  so  great  and  sudden  changes  in 
value  as  occur  in  the  market  because  of  rumors,  or  of  the  other 
vicissitudes  mentioned.  He  buys  these  stocks  to  hold,  not  for 
speculation.  Such  stocks  widely  distributed  and  firmly  held  pro- 
tect the  corporation  not  only  in  the  way  of  maintaining  a  stable 
price  for  the  stock,  but  also  in  enlisting  the  sympathy  and  active 
support  of  the  stockholders  in  case  unfavorable  legislation  is  pro- 
posed, or  there  is  other  threatening  calamity.  The  consideration 
with  respect  to  danger  from  legislation  applies  most  particu- 
larly to  corporations  that  operate  under  public  franchises.  It 
may  be  asserted,  therefore,  in  view  of  a  desirability  for  wide 
distribution,  that  the  price  of  a  stock  should  not  rise  far  above 
the  point  where  it  will  stimulate  the  greatest  demand.  The 
point  to  which  it  may  rise  above  the  point  mentioned  is  gov- 
erned by  this  consideration:  a  company  desires  to  realize  the 
largest  returns  possible  from  its  securities  when  it  places  them 
on  the  market.  Therefore,  it  will  not  seek,  through  the  price 
of  its  stock,  to  create  the  greatest  demand  so  much  as  it  will 
endeavor  to  create  a  demand  that  will  absorb  all  the  stock  and 


FORMATION  AND  ORGANIZATION  OF  A  PRIVATE  CORPORATION.      39 

bond  issue  at  a  price  that  will  realize  the  largest  income  for 
itself,  and  at  the  same  time  will  effect  a  reasonable  distribution 
of  the  stock.  This  principle  applies  as  much  to  a  speculative 
stock  as  to  a  more  distinctly  investment  stock,  because  the  higher 
the  price  the  more  money  must  be  put  up  to  carry  it,  while  the 
demand  is  relatively  less.  Also,  while  the  fluctuations  are  much 
wider  in  the  high-priced  stocks  when  they  occur,  they  are  not 
so  frequent,  and  therefore  they  afford  speculators  fewer  oppor- 
tunities for  gain.  Year  in  and  out  the  most  active  stocks  on  the 
exchanges  are  those  of  moderate  price,  which  fluctuate  within 
small  bounds.  It  follows  from  the  fact  of  lesser  demand  for  high 
priced  stocks  that  an  owner,  in  selling  them,  gets  less  in  propor- 
tion than  had  he  put  his  money  in  lower  priced  stocks.  So 
the  value  of  the  stocks  near  par  is  greater  to  their  holder  than 
are  the  high  priced  stocks.  They  are  also  more  valuable  if  he 
wishes  to  borrow  money  on  them,  both  because  of  the  larger 
proportionate  value  and  because,  on  account  of  their  narrower 
fluctuation,  the  necessary  margin  between  collateral  and  the 
amount  loaned  is  lessened.  From  all  standpoints  of  financial 
economy,  therefore,  the  desirability  of  a  moderate  priced  stock 
is  apparent.  In  providing  the  original  capitalization,  and  in 
making  subsequent  alterations  of -the  capitalization,  these  facts 
should  be  kept  in  mind.  They  apply  in  a  general  way  to  all  large 
corporations  which  have  in  view  a  permanent  and  growing  busi- 
ness. 

§28.    More  Things  in  Regard  to  Stocks  and  Bonds  to  be  Con- 
sidered before  Capitalizing. 

A  bond  is  a  form  of  a  promissory  note,  differing  from  a  prom- 
issory note  only  in  that  each  bond  is  one  of  a  series  of  bonds,  all 
of  which  are  alike  in  the  amount  of  payment  promised  and  in 
the  language  defining  the  conditions  governing  the  issue. 
Usually  the  bond  is  a  more  formal  species  of  commercial  paper, 
bearing  a  seal  and  the  signatures  of  witnesses  as  well  as  the 
signatures  of  certain  officers  of  a  company.  The  security  of  a 
bond  may  be  entirely  personal,  or  it  may  give  the  purchaser  a 


40  MODERN   BUSINESS    CORPORATIONS. 

lien  on  property.  Nearly  all  corporate  bonds  are  secured,  and 
the  common  form  of  security  is  a  mortgage  on  the  property  of 
the  company  issuing  them. 

The  purchase  of  a  corporate  bond  conveys  no  proprietary 
interest  in  a  company,  the  bond  being  merely  a  credit  obligation 
of  the  company.  There  may  be  first,  second  and  third  mortgage 
bonds  issued  on  a  property,  and  they  are  payable  and  collectible 
as  are  other  forms  of  paper  secured  by  mortgage,  but  with 
variation  from  other  forms  in  legal  procedure  for  collection. 
All  stock  conveys  a  proprietary  interest  in  a  company,  but  the 
stock  is  unsecured  and  can  command  only  its  proportion  of  the 
dividends  declared  out  of,  the  profits  of  a  company  after  the 
satisfaction  of  credit  obligations.  Stock  is  an  evidence  of  pro- 
portionate interest,  while  a  bond  is  a  contract  binding  the  com- ' 
pany  issuing  it  to  pay  a  specific  amount  of  money.  The  inter- 
est on  bonds  must  be  paid  when  due,  or  the  company's  business 
may  be  closed ;  but  the  directors  may  delay  indefinitely  the  pay- 
ment of  dividends  on  preferred  or  common  stock  without  the 
owners  having  recourse,  unless  there  is  fraud.  Common  stock 
commands  dividends  and,  sometimes,  the  exercise  of  proprietary 
corporate  powers,  without  preference.  Preferred  stock  com- 
mands a  given  dividend  before  any  dividends  are  paid  on  com- 
mon stock,  and,  as  a  rule,  is  also  preferred  in  the  matter  of 
distribution  of  assets  on  the  dissolution  of  a  company.  In  cor- 
porate finance  bonds  are  generally  issued  to  provide  permanent 
capital  at  a  low  rate  of  interest.  Preferred  stock  is  provided 
because  it  is  often  more  readily  marketable  than  common  stock, 
or  it  may  be  issued  to  meet  some  debt  of  the  company,  when  it 
is  inconvenient  or  impossible  to  otherwise  meet  the  debt,  or  to 
exchange  for  property  to  be  used  by  the  company.  Also,  if  the 
expected  profits  are  large,  a  large  part  of  the  capital  can  be  pro- 
vided by  the  sale  of  preferred  stock,  and  the  common  stock- 
holders will  get  the  benefit  of  other  profits  above  the  dividend 
paid  to  the  holders  of  preferred  stock,  unless  there  is  a  provision 
that  common  and  preferred  stockholders  shall  share  in  all  divi- 
dends above  a  certain  per  cent,  prescribed  for  each.  Preferred 
stock  is  often  issued  to  an  amount  which  represents  the  value 


FORMATION  AND  ORGANIZATION  OF  A  PRIVATE  CORPORATION.      41 

of  the  property  of  a  company,  and  common  to  such  an  amount 
as  the  expected  net  earnings  minus  the  amount  of  the  preferred  • 
dividend  claims  will  justify. 

As  a  rule,  a  large  issue  of  bonds  lessens  the  market  value  of  • 
preferred  and  common  stock,  and  a  large  issue  of  preferred  stock 
has  the  same  effect  on  the  common  stock,  unless  the  value  of  the 
company's  property  is  equal  to  the  par  value  of  both  combined, 
or  there  is  certainty  that  the  profits  will  be  so  large  that  the  com- 
mon stock  will  receive  a  large  dividend.  Particularly  is  this 
true  of  cumulative  preferred  stock,  whose  dividends,  if  not  paid 
each  year,  pile  up  as  a  charge  against  the  profits,  so  that  the  total 
unpaid  dividends  for  the  several  years  must  be  paid  before  the 
common  stock  can  receive  anything.  In  liquidation,  these  unpaid 
dividends  add  so  much  more  to  the  par  value  of  the  preferred 
stock  as  a  claim  against  the  assets  of  the  company  before  the 
common  stock  comes  in  for  a  share  in  the  distribution.  The 
value  of  common  stock  can  scarcely  receive  a  severer  blow  than 
through  the  action  of  a  board  of  directors  in  passing  (that  is, 
not  paying)  a  dividend  on  cumulative  preferred  stock.  The 
principal  danger  from  a  large  issue  of  bonds  is  that,  in  a  time 
of  business  depression,  the  company  may  not  be  able  to  meet 
the  interest  on  the  bonds  and  may  be  forced  into  liquidation. 
The  only  way  to  avoid  this  danger  is  for  the  stockholders  them- 
selves to  subscribe  for  the  bond  issue.  In  a  time  of  crisis  in  the 
business  they  will  not  enforce  their  bond  rights  against  their 
stock  interests.  However,  in  cases  where  the  stockholders  would 
buy  the  bonds,  it  would  usually  be  as  well  to  increase  and  dis- 
tribute among  the  stockholders  capital  stock  to  the  amount  of 
the  bond  issue,  and  leave  out  the  bonds  altogether,  unless  only 
a  part  of  the  stockholders  are  willing  to  take  bonds.  The  secur- 
ity of  a  bond  issue  is  the  minimum  profit  of  the  corporation 
after  operating  expenses  are  paid,  and  no  issue  of  bonds  should 
ever  be  made  the  size  of  which  is  such  that  this  profit  will  not 
meet  the  interest  requirements.  The  following  of  this  principle 
adds  safety  to  the  company,  and  it  will  also  insure  a  good  price 
for  the  bonds.  It  is  not  good  for  a  corporation  to  have  to  sell  its 
bonds  at  a  large  discount,  and  careful  buyers  must  be  shown 


42  MODERN    BUSINESS    CORPORATIONS. 

the  basis  of  value  for  the  price  they  are  paying.  As  a  rule  the 
nearer  a  company  can  come  to  limiting  the  issue  of  its  bonds  to 
an  amount  equaling  the  estimated  value  of  its  property  at  a 
forced  sale,  the  better  for  the  company,  so  far  as  concerns  the 
price  it  can  get  for  the  bond  issue.  The  rate  of  interest  on  the 
bonds  should  be  high  enough — about  the  current  market  rate — 
so  that  it  will  not  put  the  issue  at  a  disadvantage  with  reference 
to  other  bond  issues  of  equal  safety  which  are  on  the  market, 
for  then  the  bonds  will  command  par  both  because  of  their  safety 
and  their  interest  returns.  Since  the  face  value  of  bonds  must 
be  paid  at  maturity,  a  sale  of  bonds  at  less  than  par  is  discount- 
ing the  future  by  the  difference  between  the  sale  price  and  the 
par  of  the  bonds.  The  principal  advantage  of  bonds  to  the  stock- 
holder is  similar  to  that  of  preferred  stock, — that  the  interest 
paid  on  them  is  lower  than  the  customary  dividends  on  stocks, 
so  that  the  stockholders  receive  a  larger  share  of  the  profits  than 
if  an  amount  of  the  stock  equal  to  the  bond  issue  had  been  sold. 
The  prevailing  interest  on  bonds  is  from  4  to  6  per  cent.,  while 
the  dividend  on  preferred  stock  is  usually  6  or  7  per  cent. 
Common  stock  may  receive  any  dividend  the  profits  permit  and 
the  directors  may  see  fit  to  declare.  In  industrial  concerns, 
where  there  are  bonds  or  preferred  shares,  profits  should  be 
such  that  the  common  stock  will  receive  from  8  to  12  per  cent., 
owing  to  the  disadvantages  under  which  it  is  placed,  especially 
if  it  is  sold  at  par.  Sometimes  a  company  does  not  expect  to 
realize  much  from  the  sale  of  common  stock,  and  gives  free 
with  a  certain  number  of  preferred  shares,  or  with  a  bond,  sev- 
eral shares  of  common  stock  as  an  inducement  to  buy.  As  the 
preferred  stock  in  this  case  usually  represents  in  amount  the 
value  of  the  property  and  other  assets  of  the  corporation,  the 
common  stock  represents  only  a  part  of  the  expected  surplus 
earnings  above  the  dividend  or  interest  requirements.  If  it  is 
marketed  it  may  bring  30  or  40  cents,  or  some  other  low  price, 
according  to  its  prospects  for  dividends,  and  it  is  not  expected 
that  it  will  receive  a  large  dividend  until  the  profits  are  large 
enough  to  bring  its  market  value  near  or  to  par.  When  the 
profits  grow  large  enough  to  pay  high  dividends,  they  are  the 


FORMATION  AND  ORGANIZATION  OF  A  PRIVATE  CORPORATION.      43 

cause,  and  the  higher  value  of  the  common  stock  is  the  effect, 
while  in  a  case  where  par  value  was  paid  for  common  stock  it 
should  be  the  cause,  in  a  proper  capitalization,  of  a  compara- 
tively high  dividend,  if  there  are  the  preferred  shares  or  bonds 
mentioned.  The  principal  compensation  in  holding  common 
stock  is  the  larger  dividend  it  will  likely  receive  over  the  pre- 
ferred shares  and  over  the  interest  on  bonds.  Another  advantage 
that  may  be  mentioned  here  is  that  it  has  a  proportional  interest 
in  the  assets  of  the  company  to  the  extent  of  their  full  value, 
while  the  preferred  stock  is  usually  debarred  from  any  interest 
in  the  assets  beyond  its  par  or  face  value  and  arrearages  of  cumu- 
lative dividends.  If  all  the  stock  of  an  industrial  corporation 
is  common  stock,  and  there  are  no  bonds,  or  only  a  small  issue 
of  bonds,  6  or  8  per  cent,  of  dividends  is  a  fair  return  if  the 
value  of  the  assets  of  the  company  is  equal  in  amount  to  the 
price  paid  for  the  common  stock  issue,  or  greater  than  that 
price. 

As  has  been  said,  the  stockholders  are  owners  of  a  corpora- 
tion, and  the  bondholders  are  creditors.  The  latter  can  demand 
at  the  time  of  maturity  of  the  bonds  a  certain  amount  named  in 
the  bond  as  its  face  value,  and  no  more,  and  they  have  a  definite 
claim  to  the  interest  named  in  the  bond,  and  no  more.  If  stock 
were  sold  instead  of  bonds,  the  additional  stockholders  would 
share  in  all  the  profits.  But  as  a  company  can  usually  make 
more  on  the  money  borrowed  through  a  bond  issue  than  it  has 
to  pay  in  interest,  the  lesser  number  of  stockholders  get  all  the 
advantage  of  the  earnings  above  the  interest.  However,  as  the 
first  consideration  should  be  the  preservation  of  the  solvency 
of  the  company,  the  degree  of  variation  in  the  business  of  the 
company  must  be  reckoned  with  in  making  a  bond  issue. 
If  the  business  is  uniform  in  amount  and  profit  from  year  to 
year,  the  issue  of  bonds  is  a  comparatively  safe  thing  for  the 
company ;  but  if  the  business  or  profits  are  subject  to  wide  varia- 
tion, the  issue  of  preferred  stock  is  the  safer  plan.  If  it  is  in- 
tended to  pay  bonds  at  their  maturity,  instead  of  refunding  the 
debt  the  bonds  represent  by  the  issue  of  more  bonds,  the  provi- 
sion of  a  sinking  fund  must  enter  into  the  calculation.  For  this 


44  MODERN   BUSINESS    CORPORATIONS. 

purpose  a  definite  part  of  the  yearly  profits  must  be  laid  aside 
to  meet  the  payment  of  the  bond  principal.  Of  course,  this  will 
take  just  so  much  from  the  profits  used  for  interest,  dividends 
and  prudential  expenses,  such  as  a  reserve.  Instead  of  paying 
the  principal,  large  corporations  usually  issue  new  bonds  and 
exchange  them  for  the  old,  or  sell  the  new  to  new  purchasers 
and  use  the  money  to  pay  off  the  old  bonds,  thus  making  the 
bondholders  permanent  creditors  of  the  company.  On  account 
of  certain  economic  objections  to  sinking  funds,  this  is  prefera- 
ble in  all  cases  of  staple  business,  except  in  those  where  the  pro- 
ductive assets  are  gradually  depleted  through  years  of  operation 
or  otherwise.  For  instance,  the  products  of  a  mine  will  give  out 
after  a  time,  and  if  bonds  have  been  issued  a  sinking  fund  must 
have  been  created  to  retire  them.  In  continuous  businesses  the 
money  that  would  be  used  for  a  sinking  fund  had  better  be  em- 
ployed in  increasing  their  earning  capacity. 

A  further  consideration  with  reference  to  the  issue  of  bonds 
is  this :  A  bond  issue,  as  was  said,  is  an  indebtedness.  In  taxing 
corporations  many  states  permit  corporations  to  deduct  out- 
standing indebtedness  from  their  taxable  property  in  determin- 
ing the  amount  on  which  the  corporations  shall  be  taxed. 
Therefore  some  companies  save  taxes  and  state  fees  by  capitaliz- 
ing for  a  smaller  amount  than  must  be  used  in  their  business 
and  issuing  bonds  to  make  up  the  rest. 

§  29.    Capitalizing  at  Less  Than  Real  Valne. 

There  frequently  arise  circumstances  where  the  corporate 
form  of  organization  is  desirable  in  a  business  for  only  a  few 
of  the  advantages  which  it  offers.  It  may  be  desired  to  make  a 
division  and  distribution  of  interests  among  only  the  few  per- 
sons interested  and  secure  for  them  freedom  from  partnership 
liabilities.  If  their  company  were  capitalized  at  its  true  value, 
the  attention  of  the  public  might  be  called  to  the  profitableness 
of  the  business,  and  competition  might  be  aroused.  By  capitaliz- 
ing at  less  than  real  value  the  state  fees  and  taxes  are  lower, 
while  the  practical  objects  of  incorporation  are  accomplished, 


FORMATION  AND  ORGANIZATION  OF  A  PRIVATE  CORPORATION.      45 

and  little  attention  is  drawn  to  the  fact  of  incorporation.  The 
shares  in  cases  of  this  kind  are,  of  course,  worth  several  times 
their  par  value. 

§  30.    PLACING  STOCKS  AND  BONDS. 

In  companies  organized  by  a  promoter  the  disposal  of  stock 
is  usually  attended  to  by  him.  But  frequently  when  a  corpora- 
tion is  organized,  and  the  promoter's  work  is  considered  to  be 
done,  all  the  stock  has  not  been  subscribed  and  the  corporators 
expect  to  sell  the  balance  to  provide  funds  for  more  extensive 
operation,  etc.  It  is  always  better  to  have  enough  stock  sub- 
scribed before  incorporating  to  run  the  business,  for  stock  can- 
not always  be  sold  easily  or  advantageously.  In  small  concerns, 
new  ones  or  old  ones  reorganized,  where  there  is  a  balance  of  un- 
subscribed stock,  the  sale  of  it  depends  usually  upon  the  cor- 
porators or  such  unprofessional  salesmen  as  they  may  be  able 
to  employ.  Conservative  professional  stock  salesmen,  such  as 
financial  bankers  and  stock-brokers,  do  not  usually  take  issues 
of  stock  for  sale  where  the  concern  is  small  and  new  and  its 
earning  capacity  uncertain  or  wholly  speculative.  In  the  case  of 
large  or  old  companies,  which  have  increased  their  capitaliza- 
tion on  a  proper  basis,  or  in  reorganized  companies  where  the 
stock  has  acquired  an  estimable  value,  or  in  large  companies 
where  the  profits  are  calculable  with  reasonable  certainty,  stock 
and  bond  dealers,  financial  bankers — sometimes  private,  some- 
times national, — and  trust  companies  will  frequently  act  as  fis- 
cal agents  and  take  stock  for  sale  on  commission,  or  will  under- 
write it.  When  stock  is  sold  for  a  commission  the  commission 
is  a  matter  of  arrangement  between  the  corporation  and  the 
selling  agent,  and  usually  depends  on  the  degree  of  ease  with 
which  the  stock  may  be  marketed,  which  depends  largely  on  the 
financial  reputation  of  the  corporators  or  the  corporation  and 
on  the  prospective  value  of  the  stock.  When  a  well  paying  com- 
mon or  preferred  stock  is  backed  by  assets  which  are  salable  at  a 
figure  which  will  protect  the  stock  at  par  after  prior  claims 
against  the  assets  are  deducted,  the  commission  may  run  any- 


46  MODERN   BUSINESS    CORPORATIONS. 

where  from  4  to  10  per  cent.  When  stocks  are  underwritten, 
the  profit  required  by  the  underwriter  depends  usually  on  the 
actual  and  certain  value  of  the  stock,  though  it  sometimes  de- 
pends mostly  on  the  underwriter's  certainty  that  he  will  be  able 
to  dispose  of  the  stock  within  the  time  specified  in  the  agree- 
ment. The  .underwriting  of  stocks  (and  this  applies  also  to 
bonds)  consists  in  subscribing  for  an  entire  issue  or  balance 
of  an  issue  at  a  certain  price,  to  be  paid  within  a  certain  time, 
say  six  or  nine  months.  The  object  of  the  underwriter  is  to  sell 
the  securities  within  that  time  at  a  price  in  excess  of  what  is  to 
be  paid.  If  all  the  securities  are  not  sold  the  underwriter  must 
pay  for  what  is  left  on  his  hands  when  the  time  is  up.  The 
underwriter  does  not  expect  to  use  much  of  his  money  in  the 
transaction,  as  he  will,  in  paying  his  own  debt,  use  the  money 
paid  by  the  subscribers  to  him.  Sometimes  a  portion  of  the 
amount  subscribed,  usually  from  10  to  30  per  cent,  of  it,  may 
be  made  in  the  agreement  subject  to  call,  and,  if  called,  it  is 
paid.  For  assuming  the  risk,  and  furnishing  the  small  amount 
called,  if  any,  he  will  have  as  his  profit  the  difference  between 
the  underwriting  price  and  the  sale  price  to  the  public.  Under- 
writing on  a  large  scale  is  done  by  such  banking  concerns  as 
J.  P.  Morgan  &  Co.,  the  National  City  Bank,  the  Bank  of  Com- 
merce and  the  First  National  Bank,  of  New  York.  They  are 
really  wholesale  bond  dealers.  In  unusually  large  underwriting 
transactions  a  syndicate  of  bankers  is  usually  formed  to  share 
the  risks  and  the  profits,  and  a  syndicate  manager  is  chosen 
from  among  the  banks  interested  to  conduct  the  transaction. 
The  syndicate  manager  receives  an  extra  share  of  the  profit  for 
the  extra  services  performed.  The  syndicate  agreement  simply 
recites  that  the  several  banks  agree  to  purchase  at  the  given  price 
and  within  the  given  time  the  amount  of  stocks  or  bonds  set 
opposite  their  respective  names,  and  to  furnish  on  call  a  certain 
amount  of  money  to  pay  for  the  stock  subscribed.  When  the 
transaction  is  finished  the  syndicate  manager  sends  each  mem- 
ber of  the  syndicate  a  check  for  the  amount  which  was  called, 
and  the  share  of  profits  which  belongs  to  that  member.  If  all 
the  securities  are  not  sold,  and  the  members  must  redeem  their 


FORMATION  AND  ORGANIZATION  OF  A  PRIVATE  CORPORATION.      47 

pledge  to  take  part  of  their  subscription,  the  syndicate  manager 
so  notifies  the  members  and  they  furnish  in  proportion  to  their 
subscriptions  the  funds  to  purchase  the  securities  still  on  hand. 
The  profits  in  underwriting  vary  greatly,  and  increase  in  propor- 
tion as  the  securities  are  of  uncertain  value.  Kailroad  bonds  are 
more  stable  and  certain  in  value  than  those  of  the  industrial 
trusts.  A  good  three-and-a-half  per  cent,  railroad  bond  which  will 
probably  sell  at  about  105  will  be  underwritten  at  about  98.  An 
industrial  bond  that  sells  at  par  will  command  to  the  underwriter 
a  greater  per  cent,  by  several  points.  The  preferred  stock  of  an 
industrial  trust  which  will  sell  to  the  public  at  about  80  cents  will 
be  underwritten  at  from  60  to  65  cents.  The  underwriter  is  fre- 
quently never  the  owner  of  the  shares  underwritten;  he  fur- 
nishes funds  for  organizing,  equipping  or  operating  the  corpo- 
ration, and  undertakes  to  secure  himself  .and  make  a  profit  by 
selling  the  securities. 

A  financial  journal  says  the  following  regarding  the  means 
of  distributing  bonds : 

"The  machinery  that  distributes  over  the  world  the  steady 
stream  of  bonds  created  by  American  corporations  is  little 
understood  outside  of  Wall  street  itself.  Only  the  result  is 
noted,  namely,  that  some  companies  can  distribute  these  securi- 
ties broadcast  with  apparent  ease,  while  other  companies,  ap- 
parently of  equal  strength,  appear  unable  to  accomplish  the  same 
result  without  a  long  period  of  'digestion/ 

"Boughly,  there  are  three  methods  whereby  a  company  can  sell 
its  bonds.  One  is  to  sell  direct  to  the  public  through  the  stock 
exchange,  or  by  actual  canvass.  Only  new  companies  use  the 
latter  means,  and  bonds  hawked  around  the  country  in  this 
way  are  generally  of  low  repute.  The  sale  through  the  stock  ex- 
change is  now  generally  carried  out  by  the  fiscal  agents  of  the 
company,  and  is  unusual  except  for  the  sale  of  small  lots  of 
well-known  and  active  bonds. 

"A  variation  of  this  method  is  found  in  the  case  of  Eock 
Island,  for  instance.  The  old  stockholders  of  the  railway  com- 
pany were  offered  $100  in  4  per  cent,  bonds,  $70  in  preferred 
stock,  and  $100  in  Eock  Island  common.  The  result  is  well 


48  MODERN   BUSINESS    CORPORATIONS. 

known.  The  new  bonds  went  into  the  hands  of  a  stockholding 
public,  which  had  them  at  no  stated  price,  and  which  sold  them 
freely  when  the  decline  came.  This  method  is  now  generally  re- 
garded as  dangerous.  It  avoids  the  payment  of  commissions, 
and  thereby  makes  enemies  of  the  kind  who  can  do  most  harm. 

"The  first  method  of  distribution  is  less  popular  year  by 
year.  It  has  come  to  be  recognized  that  commissions  must  be 
paid  to  bankers.  In  return  the  bankers  loan  their  credit  to  the 
bonds,  placing  them  with  their  own  public  following.  The  com- 
mission is,  to  all  intents,  the  price  of  the  bankers'  credit.  The 
commission,  therefore,  varies.  If  the  company  is  weak  and 
the  banker  strong,  the  commission  is  very  heavy.  If  the  com- 
pany is  strong  and  the  banker  weak,  the  latter  is  glad  to  take  the 
bonds  at  a  very  slight  profit. 

"The  second  general  method  is  to  sell  the  bonds  in  a  block  to 
one  of  the  great  underwriters.  Pennsylvania,  Baltimore  &  Ohio, 
Union  Pacific,  and  many  others  sell  direct  to  Kuhn,  Loeb  &  Co., 
get  the  money,  and  thereafter  take  only  an  indirect  interest  in 
the  bonds.  Eock  Island  sells  to  Speyer  &  Co.,  'Frisco  to  Blair '& 
Co.  and  others,  New  York  Central,  Lake  Shore,  Southern  Kail- 
way,  Erie  and  others  to  J.  P.  Morgan  &  Co.  The  price  at 
which  these  railroads  sell  their  bonds  to  the  underwriters  is  not 
generally  known.  It  is  taken  to  be  a  private  matter,  but  it  often 
leaks  out. 

"The  third  method,  not  uncommon,  is  to  sell  the  bonds  to 
the  big  retail  bond  houses,  who  distribute  them  to  a  wide  and 
wealthy  public  through  advertising  and  through  correspondence. 
Each  of  these  houses  has  its  clientele.  Some  are  strong  in  New 
York,  others  in  Canada,  others  in  the  South,  etc.  They  are  more 
or  less  specialists,  and  get  to  be  known  for  a  particular  grade 
of  bonds  or  stocks. 

"These  two  last  methods,  of  course,  overlap  greatly.  Harvey 
Fisk  &  Sons,  for  instance,  known  for  years  as  a  big  retail  bond 
house  of  wide  clientele,  frequently  underwrite  whole  issues  of 
new  securities,  as  in  the  case  of  the  Electrical  Securities  col- 
laterals, recently  brought  out.  Similarly,  Fisk  &  Robinson  took 
the  whole  issue  of  the  new  Buffalo  &  Susquehanna  Eailway  4  l-2s. 


FORMATION  AND  ORGANIZATION  OF  A  PRIVATE  CORPORATION.      49 

J.  P.  Morgan  &  Co.,  Kuhn,  Loeb  &  Co.  and  Speyer  &  Co. 
generally  participate  to  a  greater  or  less  extent  in  any  extensive 
new  bond  issue,  because  their  clientele  demands  it,  even  though 
these  firms  may  not  be  the  original  underwriters. 

"Another  phase  of  the  underwriting  industry  is  the  'under- 
writer's option/  An  underwriting  firm  takes  a  block  of  bonds 
at,  say,  97,  payable  only  as  resold.  The  firm  then  offers  the 
bonds  at  any  price  above  97,  and  pays  over  to  the  company  97 
for  the  amount  of  bonds  sold.  In  this  class  of  underwriting  the 
company  generally  co-operates  strongly  with  the  bond  house.  A 
great  deal  of  this  class  of  business  is  carried  on.  Bond  salesmen 
for  big  houses  generally  carry  to  outlying  cities  a  commission 
to  sell,  at  stated  price,  the  bonds  of  a  dozen  or  more  railroads, 
none  of  whose  bonds  are  actually  owned  by  the  house  at  the  time. 
The  bonds  may  be  called  at  a  given  figure  within  a  certain  time. 

"It  is  a  question  how  much  of  this  business  is  done  by  the  big 
underwriters.  Doubtless,  if  the  truth  were  known,  a  great  many 
of  „  the  sales  of  big  blocks  of  bonds  are  of  this  nature,  but  they 
are  not  generally  published  as  such. 

"The  reputation  of  the  underwriters  is  a  thing  very  jealously 
guarded.  A  foreign  clientele  is  one  of  the  most  valuable  assets 
possible,  and  a  clear  record  in  respect  to  coupons  is  a  matter  of 
high  pride.  When  a  house  can  say  that  none  of  the  bonds  it 
has  sold  to  the  public  has  ever  defaulted  it  can  make  a  boast  to 
be  proud  of. 

"Again,  some  houses  have  a  reputation  among  the  retail 
dealers  for  floating  bonds  at  the  top  price,  while  others  are  con- 
sidered more  liberal.  Bonds  brought  out  by  one  house  are  con- 
sidered bargains  when  issued,  while  bonds  brought  out  by  a  near 
neighbor  are  generally  expected  to  be  better  bargains  in  six 
months  or  so.  This  is  a  matter  of  local  reputation.  The  bond 
dealers  in  the  street  know  all  these  little  things,  but  the  savings 
banks,  the  country  at  large  and  the  foreigners  are  not  so  keen." 

MOD.  Bus.  CORP. — 4 


50  MODERN   BUSINESS   CORPORATIONS. 

§  30a.   FINANCIAL  BANKING  AND  TRUST  ORGANIZATION. 

The  organization  of  mammoth  business  corporations,  many 
of  which  are  trusts  or  are  monopolistic  in  their  nature,  has  given 
rise  to  an  extended  and  differentiated  use  of  banking  functions. 
To  illustrate  the  formation  of  a  trust  and  the  operation  of  finan- 
cial banking,  the  following  is  taken  from  an  address  delivered 
by  Thomas  F.  Woodlock,  an  editor  of  The  Wall  Street  Journal, 
to  a  bankers'  convention : 

"The  function  of  commercial  banking  is  to  facilitate  the  pro- 
duction, transportation  and  distribution  of  commodities  of  gen- 
eral use  through  all  the  stages  that  lie  between  the  original  pro- 
ducer and  the  ultimate  consumer.  In  ISTev  York,  and  more 
particularly  in  Wall  street,  banks  perform  a  different  function. 
They  conduct  a  financial  banking  business,  which  does  for  prop- 
erty other  than  commodities  what  commercial  banking  does 
for  commodities.  Financial  banking  facilitates  the  transporta- 
tion of  property  through  all  its  metamorphoses  from  the  hands 
of  one  owner  to  those  of  another.  Financial  banks  merchandise 
credit  just  as  commercial  banks  do,  but,  of  course,  a  different 
set  of  problems  arise. 

"This  distinction  between  commercial  and  financial  banking 
is  very  simple.  So  is  the  principle  of  finance  itself.  If  you  come 
to  think  of  it,  the  art  of  finance  consists  in  the  transfer  of 
property  from  hand  to  hand,  which,  in  the  generality  of  cases, 
means  the  supplying  of  investments  and  the  collection  of  capi- 
tal for  investment.  As  conducted  nowadays,  it  means,  in  fact, 
the  manufacture  or  collection  of  securities  and  their  sale  to 
investors.  By  investors  I  mean  those  who  purchase  to  hold  for 
investment,  as  contrasted  with  those  who  are  traders,  or  specu- 
lators, because  they  purchase  for  quick  re-sales.  You  are,  of 
course,  entirely  familiar  with  the  nature  of  securities,  which  is, 
in  the  main,  twofold.  Securities  are  either  evidence  of  title  or 
equity,  or  evidences  of  debt.  I  need  not  waste  time  in  describing 
them  in  detail  further  than  to  remind  you  that  they  exist  in  every 
shape,  manner  and  form,  and  are  of  every  grade  of  value.  Their 
variety  is  almost  infinite. 


f  UNIVERSITY  ) 

OF  I 

^s£4LiFCRt^^^ 
FORMATION  AND  ORGANIZATION  OF  A  PRIVATE  CORPORATION.      51 

"In  order  to  explain  the  principal  operations  of  financial 
banking,  I  shall  take  a  hypothetical  case  of  the  very  simplest 
form.  Let  us  suppose  a  bank  starting  business  with  a  capital  of 
$1,000,000  and  a  surplus  paid  in  of  $1,000,000.  The  bank  is 
able  to  secure  100  depositors,  each  of  whom  has  $100,000,  mak- 
ing a  total  of  $10,000,000  on  deposit  account.  It  loans  to  ninety 
individual  manufacturers  of  cigars  the  sum  of  $100,000  each 
for  use  in  their  business,  so  that  its  loans  amount  to  $9,000,000. 
The  bank's  condition  is  then  expressed  in  the  following  state- 
ment of  assets  and  liabilities : 

ASSETS. 

Loans  $9,000,000 

Cash  in  vault 3,000,000 


Total $12,000,000 

LIABILITIES. 

Deposit   account $10,000,000 

Capital  and  surplus 2,000,000 


Total $12,000,000 

"The  bank  is  doing  a  commercial  business,  as  it  is  lending 
money  to  cigar  manufacturers  on  commercial  paper  or  notes. 
Some  of  this  money  it  is  lending  on  call,  and  some  on  time,  so 
that  it  may  be  able  to  meet  any  demands  that  its  depositors  may 
make  upon  it.  Among  the  directors  of  the  bank  te  a  financier, 
or  promoter,  who  is  cognizant  of  the  business  of  the  bank.  The 
idea  occurs  to  him  that  a  trust  can  be  formed  of  the  cigar  manu- 
facturers, from  which  a  promoter's  profit  can  be  extracted.  He 
sends  his  agents  to  investigate  the  condition  of  the  various  manu- 
facturers' plants,  and  the  information  he  secures  confirms  his 
original  idea.  He  thereupon  secures  an  option  from  each  of 
the  manufacturers  to  purchase  his  business  at  a  certain  price. 
The  price  is  fixed  upon  such  a  basis  that  the  borrowings  of  the 
manufacturers  at  the  bank  are  to  be  paid  off,  and  each  manu- 


52  MODERN   BUSINESS   CORPORATIONS. 

facturer  is  to  have  stock  in  the  new  trust.  The  financier  pro- 
poses a  capitalization  of-  $10,000,000  bonds,  $10,000,000  pre- 
ferred and  $10,000,000  common  stock,  and  it  is  understood 
that  the  bonds  are  to  be  sold  to  him  at  90  cents  on  the  dollar 
- — thus  providing  the  $9,000,000  necessary  to  pay  off  the  bor- 
rowings at  the  bank,  and  he  has  further  the  option  of  buy- 
ing the  stocks  of  the  new  trust  at  60  cents  on  the  dollar  for 
the  preferred  stock  and  at  30  cents  on  the  dollar  for  the  common 
stock.  He  is  bound,  therefore,  to  provide  $9,000,000  cash,  for 
which  he  gets  $10,000,000  bonds,  and  he  has  the  right  of  putting 
up  $9,000,000  more  cash  to  get  all  the  stocks  of  the  company  to 
be  formed. 

"He  organizes  a  syndicate  to  take  the  bonds  at  90,  agreeing 
with  the  syndicate  that  they  shall  ultimately  be  sold  to  the 
public  at  par,  thus  netting  a  profit  of  $1,000,000  on  the  $10,- 
000,000  bonds.  Of  this  $1,000,000  he  has  to  have  $250,000  for 
himself,  representing  the  compensation  for  his  initial  risk  and 
trouble,  the  rest  being  divided  pro  rata  among  the  members  of 
the  syndicate.  The  syndicate  is  formed.  On  a  certain  day  pay- 
ment is  to  be  made  to  the  cigar  manufacturers,  who  will  receive 
$10,000,000  preferred  stock  and  $10,000,000  common  stock  in 
the  new  company,  and  have  their  loan  at  the  bank,  amounting  to 
$9,000,000,  paid  off.  On  paying  off  these  loans  the  syndicate 
will  have  $10,000,000  bonds  of  the  new  company.  Inasmuch  as 
the  bank  is  going  to  be  paid  its  $9,000,000  of  commercial  bor- 
rowings, it  has  $9,000,000  to  loan  the  syndicate,  and,  accord- 
ingly, the  financier  arranges  to  borrow  $9,000,000  from  the 
bank  for  the  syndicate,  which  puts  as  collateral  security  the 
bonds  of  the  new  company  and  such  other  securities  as  margin 
as  the  bank  may  desire,  these  securities,  of  course,  being  taken 
from  the  syndicate's  own  resources.  The  arrangement  is  satis- 
factory, and  on  the  day  appointed  the  deal  takes  place.  The 
bank's  condition  is  then  precisely  similar  to  what  it  was,  except 
that  instead  of  lending  $9,000,000  to  commercial  borrowers  on 
their  own  notes,  it  is  now  lending  $9,000,000  on  collateral  se- 
curities to  the  syndicate.  The  former  cigar  manufacturers  are 


FORMATION  AND  ORGANIZATION  OF  A  PRIVATE  CORPORATION.      53 

now  stockholders  in  the  new  corporation,  subject  to  the  optional 
right  of  the  syndicate  to  purchase  their  holdings  at  an  aggre- 
gate sum  of  $9,000,000. 

"The  times  being  propitious,  the  financier  decides  that  the 
public  will  take  the  $10,000,000  bonds  at  par,  and  arrangements 
are  made  for  a  public  offering  at  that  price  on  a  given  day.  The 
issue  is  extensively  advertised  and  it  attracts  the  notice  -of  the 
bank's  depositors,  one  hundred  in  number,  each  having  $100,000 
to  his  credit.  Each  depositor  makes  up  his  mind  that  the 
bonds  are  a  good  thing,  and  each  subscribes  for  $100,000,  being 
the  amount  of  his  idle  money  on  deposit.  The  result  is  that  the 
syndicate  has  sold  its  $10,000,000  bonds  to  realize  $10,000,000, 
and  having  paid  but  $9,000,000  therefor,  it  has  a  profit  of 
$1,000,000.  If  the  transaction  were  'closed  at  this  point  the 
$'9,000,000  loaned  would  disappear  and  the  original  $10,000,000 
deposited  would  disappear,  and  there  would  be  $1,000,000  de- 
posits, representing  the  syndicate's  profits,  and  the  bank  would 
have  $3,000,000  cash  representing  its  own  capital  and  surplus 
and  this  $1,000,000  deposit.  The  bonds,  however,  have  gone  so 
well  that  the  financier  decides  that  it  is  wise  for  him  to  exercise 
his  option  on  the  company's  stock,  and  he  determines  to  buy 
from  the  stockholders,  under  his  option,  $10,000,000  of  the  pre- 
ferred stock  at  60,  and  $10,000,000  of  the  common  stock  at 
30,  the  total  cost  being  $9,000,000.  He  arranges  with  the  bank 
to  again  borrow  $9,000,000,  this  time  on  the  stocks  as  collateral, 
with  such  other  margin  as  the  bank  may  require,  as  in  the  case 
of  the  bonds.  When  this  operation  is  completed  the  bank's  po- 
sition is  as  follows : 

LIABILITIES. 

Deposit  to  credit  of  syndicate $1,000,000 

Deposits  to  credit  of  former  stockholders.     9,000,000 
Capital  and  surplus. 2,000,000 


Total $12,000,000 


54  MODERN   BUSINESS   CORPORATIONS. 

ASSETS. 

Loans  to  syndicate  on  stocks $9,000,000 

Cash  in  vault 3,000,000 


Total $12,000,000 

"The  task  of  the  syndicate  now  is  to  sell  the  stocks  thus  pur- 
chased at  a  profit.  This  involves  the  usual  practice  of  'making 
a  market'  for  them,  probably  on  the  curb  market.  Transactions 
are  made  of  what  is  called  a  'wash'*  character,  at  continually 
advancing  quotations,  between  brokers  employed  by  the  syndi- 
cate. I  regret  to  state  that  the  financier  will  probably  endeavor 
to  have  judicious  paragraphs  inserted  in  newspapers  calling  at- 
tention to  the  great  merits  of  these  stocks.  Some  newspapers 
will  print  them,  others  will  not.  Finally,  quotations  for  the 
preferred  stock  being  marked  up  to  65  and  quotations  for 
the  common  stock  being  marked  up  to  35,  the  stirrings  of  cupid- 
ity make  themselves  felt  in  the  hearts  of  the  gentlemen  who 
took  the  company's  bonds  for  investment.  These  gentlemen  are 
convinced  that  the  time  has  arrived  for  them  to  take  a  little 
speculative  'flyer'  inthe  company's  stocks,  and,  strange  to  re- 
late, each  one  elects  to  buy  for  himself  on  speculation  1,000 
shares  of  the  preferred  stock  at  65,  and  1,000  shares  of  the  com- 
mon stock  at  35.  Being  speculators  in  this  instance,  they  have  to 
borrow  money  in  order  to  pay  for  the  stocks,  and  as  each  one  has 
$100,000  bonds  of  the  new  company,  each  has  plenty  of  margin 
with  which  to  make  a  loan.  Consequently  they  go  to  the  bank 
and  borrow  $100,000  each  on  1,000  shares  of  preferred  stock  and 
1,000  shares  of  common  stock,  with,  say,  $30,000  of  bonds  as 
margin.  The  syndicate  having  sold  the  stocks  which  cost  it 
$9,000,000  to  speculators  for  $10,000,000,  makes  another  profit 

*  "Wash"  sales  are  where  one  broker  arranges  with  another  to  pretend 
to  buy  a  certain  stock  when  the  first  broker  offers  it  for  sale.  The  bargain 
is  fictitious,  and  the  effect  is  to  keep  the  stock  quoted.  Or,  as  in  the 
case  above,  the  plotters  buy  and  sell  and  run  the  stock  up  to  a  high  fig- 
ure as  a  basis  for  actual  sales. 


FORMATION  AND  ORGANIZATION  OP  A  PRIVATE  CORPORATION.      55 

of  $1,000,000  on  the  operation,  and  is  besides  enabled  to  pay  off 
its  borrowings  at  the  bank.  After  this  operation  the  position  of 
the  bank  is  as  follows : 

LIABILITIES. 

Deposits  of  syndicate $2,000,000 

Deposits  of  former  stockholders 9,000,000 

Capital  and  surplus 2,000,000 


Total $13,000,000 


ASSETS. 


Loans  to  speculators  on  company's  stocks 

and   bonds    $10,000,000 

Cash  in  vault 3,000,000 


Total * .,$13,000,000 

"The  syndicate  has  cleaned  up  $2,000,000  on  the  operation 
and  is  content.  The  original  cigar  manufacturers  have  not 
merely  sold  their  business  to  the  trust,  but  have  sold  their  stock 
holdings  to  the  trust,  and  are  now  plain  capitalists,  with  $9,000,- 
000  to  their  credit  at  the  bank.  The  original  depositors  are 
now  speculators  in  the  company's  stock  and  investors  in  the 
company's  bonds.  Incidentally,  they  are  borrowers  of  $10,000,- 
000. 

"In  a  little  while  the  cigar  trust  falls  upon  evil  days,  and  the 
dividend  on  the  common  stock,  which  was  started  on  a  4-per-cent. 
basis,  has  to  be  suspended.  The  speculators  become  alarmed  and 
endeavor  to  sell  their  speculative  holdings.  The  price  of  the 
preferred  stock,  which  cost  them  65,  falls  to  55,  and  the  price 
of  the  common  stock,  which  cost  them  35,  falls  to  25.  The  origi- 
nal stockholders  see  an  opportunity  to  repurchase  their  hold- 
ings for  less  money  than  they  received  when  they  sold  them, 
and  they  conclude  to  repurchase  at  55  and  25,  making  a  total 
cost  of  $8,000,000.  They  have  $9,000,000  on  deposit  at  the  bank, 
and  they  use  $8,000,000  of  this  to  buy  back  the  stocks  from  the 


56  MODERN"   BUSINESS   CORPORATIONS. 

speculators,  who  have  borrowed  $10,000,000  on  them.  The 
speculators  are  thus  able  to  pay  off  $8,000,000  of  their  $10,000,- 
000  borrowings,  leaving  $2,000,000  still  borrowed  on  security 
of  $3,000,000  of  the  company's  bonds.  When  this  operation  is 
completed  the  bank's  position  is  as  follows : 

LIABILITIES. 

Deposits  to  credit  of  syndicate $2,000,000 

Deposits  remaining  of  former  stockholders     1,000,000 
Capital  and  surplus. 2,000,000 


Total $5,000,000 


ASSETS. 


Loans  to  speculators  on  bonds $2,000,000 

Cash  in  vault 3,000,000 


Total $5,000,000 

"The  affairs  of  the  trust  go  from  bad  to  worse,  and  there  is 
a  question  of  its  ability  to  continue  interest  payments.  The 
price  of  the  bonds  falls  materially,  and  the  bank  becomes 
anxious.  It  calls  upon  the  speculators  for  more  margin,  and 
gets  from  each  another  $10,000  bonds,  being  $4,000,000  in 
all,  to  secure  loans  of  $2,000,000.  The  price  of  the  bonds  falls 
further,  and  the  bank  demands  payment  of  the  loans.  The 
financier,  having  taken  pains  at  the  outset  to  inform  himself  of 
the  true  conditions,  and  knowing  that  the  depression  in  the  cigar 
trust's  affairs  is  but  temporary,  decides  that  it  would  be  a  good 
plan  for  his  syndicate  to  make  a  bid  to  the  borrowers  of  50  cents 
on  the  dollar  for  $4,000,000  of  the  bonds,  this  being  just 
enough  to  enable  them  to  pay  off  their  borrowings  at  the  bank, 
and  this  being  exactly  the  amount  of  the  deposit  to  the  syndi- 
cate's credit,  representing  their  profits  on  the  business.  The 
speculators  accept  his  offer.  lie  buys  for  his  syndicate  $4,000,- 
000  of  the  bonds  at  50  cents  on  the  dollar.  The  speculators  are 


FORMATION  AND  ORGANIZATION  OF  A  PRIVATE  CORPORATION.      57 

able  to  pay  off  the  $2,000,000  they  owe  at  the  bank,  the  syndi- 
cate drawing  on  its  $2,000,000  deposit  to  pay  for  the  bonds. 
The  bank's  position  then  stands  as  follows : 


LIABILITIES. 


Deposits  of  former  stockholders $1,000,000 

Capital  and  surplus 2,000,000 


Total $3,000,000 

ASSETS. 

Cash  on  hand $3,000,000 

"The  original  stockholders  think  they  need  a  little  ready 
money  on  hand  and  draw  out  their  deposits  in  cash,  leaving  the 
bank  exactly  where  it  started,  viz. :  with  $2,000,000  cash  in  its 
vaults,  representing  its  paid  up  capital  and  surplus.  I  have  omit- 
ted to  take  any  account  of  the  matter  of  interest,  so  as  not  to 
unnecessarily  complicate  the  figures,  and  it  is  only  a  matter  of 
detail,  anyhow. 

"Observe  what  has  occurred.  Ninety  separate  and  distinct 
individual  borrowers,  each  borrowing  $100,000,  and  each  own- 
ing a  cigar  manufacturing  business,  have  been  formed  into  a  cor- 
poration. One  hundred  individual  depositors  of  $100,000  each, 
making  $10,000,000  in  all,  have  become  investors  in  the  bonds 
of  the  corporation,  and  a  syndicate,  headed  by  a  financier,  has 
extracted  $2,000,000  profit  from  the  whole  operation.  If  we 
suppose  the  company's  bonds  again  to  become  worth  par,  the 
'profit  and  loss3  of  the  operation  will  be  a  gain  to  the  syndicate 
of  $4,000,000,  as  it  invested  its  $2,000,000  profit  in  bonds  at 
50  cents  on  the  dollar,  which  $4,000,000  has  been  lost  by  the 
speculators,  who  originally  had  $10,000,000  deposits  in  the 
bank,  and  now  have  only  $6,000,000  of  bonds.  The  position  of 
the  individual  borrowers  at  the  start  is  exactly  the  same,  inas- 
much as,  while  they,  as  stockholders  of  the  company,  are  now 
borrowing  $10,000,000  on  the  company's  bonds  in  place  of  the 


58  MODERN   BUSINESS   CORPORATIONS. 

$9,000,000  they  originally  borrowed  on  their  own  notes  they 
have  secured  $1,000,000  in  cash,  which  accounts  for  the  differ- 
ence. 

"It  is  important  to  note  the  factors  that  may  be  operative 
so  far  as  the  bank  is  concerned  at  the  various  stages  of  the  whole 
business.  While  the  bank  is  doing  a  commercial  business,  it 
must,  of  course,  so  arrange  its  commercial  loans  as  to  have 
maturities  falling  in  all  the  time,  and  thus  be  able  to  pay  its 
depositors.  At  the  second  stage  of  the  operation,  however,  where 
the  bank  is  lending  on  collateral  securities,  the  problem  is  a 
little  different.  Its  ability  to  meet  a  sudden  call  on  its  depositors 
depends  on  the  ability  of  the  syndicate  to  pay  its  loans.  The 
syndicate  can  only  pay  its  loans  by  being  able  to  sell  securities 
for  cash,  either  the  collateral  securities  upon  which  it  is  borrow- 
ing, or  such  other  securities  as  it  may  have  in  its  resources. 
Somebody  must  be  able  to  buy  the  securities  from  the  syndicate 
for  cash,  or  the  syndicate  cannot  pay  its  loans.  It  is  evident  that 
a  sale  to  speculators  merely  will  not  improve  the  case,  unless  the 
speculators  can  borrow  money  elsewhere  than  at  the  bank,  be- 
cause if  the  speculators  had  to  borrow  from  the  bank  there 
would  simply  be  a  shifting  of  loans  from  one  borrower  to  an- 
other, which  would  not  provide  the  means  to  pay  depositors. 
Therefore,  if  the  depositors  of  a  financial  bank  want  their 
money,  the  collateral  upon  which  the  bank  is  lending  must  be 
marketable  to  somebody  who  can  provide  the  money  for  the  de- 
positors. Convertibility  of  loans  is  just  as  much  the  first  requi- 
site of  financial  banking  as  it  is  of  commercial  banking,  but  you 
will  readily  understand  that  the  sale  of  securities  to  investors  is 
quite  a  different  thing  from  the  sale  of  commodities  to  consum- 
ers. Where  a  bank  is  lending  on  speculative  securities,  con- 
vertibility in  the  full  sense  of  the  word  is  more  difficult  than 
where  it  is  lending  on  strictly  investment  securities.  First-class 
railroad  bonds,  for  instance,  can  always  be  sold  to  investors  at  a 
price  except  in  times  of  extraordinary  monetary  stringency. 
Even  then  they  can  be  sold,  because  they  are  the  first  thing  that 
an  investor  will  buy.  Stocks  of  a  speculative  character  cannot 
.always  be  sold.  There  comes  a  time  about  once  in  so  often 


FORMATION  AND  ORGANIZATION  OF  A  PRIVATE  CORPORATION.       59 

when  we  have  a  panic.  Such  a  time,  for  example,  was  May  9, 
1901.  The  panic  at  that  time  came  in  the  forenoon,  and  there 
was  time  for  the  rally  before  the  close  of  the  market,  the  closing 
prices  being,  of  course,  the  basis  for  settlement.  Had  the  panic 
come  at  2  o'clock  in  the  afternoon,  and  had  the  market  closed  at 
the  panic  prices,  there  would  have  been  a  record  of  insolvencies 
such  as  never  was  seen.  The  banks  would,  of  course,  have  been 
very  heavy  losers  all  around. 

"The  hypothetical  case  that  we  have  considered  contains  the 
general  principles  of  financial  banking,  and,  in  fact,  of  finance 
as  it  is  conducted  in  Wall  street/' 

The  operations  here  illustrated,  with  many  variations,  are 
common  in  Wall  street  and  are  becoming  more  common  all  over 
the  country.  This  particular  illustration  shows  how  the  finan- 
cial banking  concerns  may  make  money;  not  all  the  operations 
of  financial  banking  are  so  disastrous  to  investors.  Most  of  the 
operations  of  financial  banking  are  smaller  than  those  that  have 
to  do  with  the  formation  of  trusts,  but  they  are  frequently  simi- 
lar in  detail.  Such  operations  are  incidental  to  banking  and  trust 
company  practices  outside  of  New  York. 

§  31.  The  Stock  Exchange.  Many  of  the  larger  cities  have 
stock  exchanges,  which  facilitate  the  marketing  of  stocks  and 
bonds  and  give  a  certain  tacit  recommendation  to  the  stocks 
and  bonds  they  list  on  account  of  the  rules  necessary  to  be  com- 
plied with  by  corporations  which  seek  to  have  their  stocks  and 
bonds  admitted  to  dealings  on  the  exchange.  Exchanges  do 
not,  of  course,  guarantee  the  value  of  stocks  and  bonds  listed, 
but  they  permit  only  such  securities  to  be  dealt  in  as  are  thought 
to  have  real  value.  Only  large  companies  with  large  capitaliza- 
tions have  their  securities  listed  on  exchanges,  and  the  ad- 
vantage of  listing  lies  both  in  the  fact  that  a  broader  market 
for  the  securities  is  afforded  and  that  listed  securities  can 
ordinarily  be  hypothecated  for  loans  to  better  advantage  than 
unlisted  securities.  The  exchanges  have  committees  to  which  ap- 
plication is  made  by  those  who  wish  to  have  certain  securities 
dealt  in,  and  these  committees  pass  on  the  eligibility  of  the 


60  MODERN    BUSINESS    CORPORATIONS. 

securities  as  measured  by  the  rules  of  the  exchange.  To  cite 
instances  of  the  rules  of  the  New  York  exchange  the  following 
will  serve.  In  the  case  of  reorganized,  businesses,  the  exchange 
demands  a  description  of  the  new  securities  issued,  a  complete 
financial  statement  of  the  business  for  a  period  of  at  least  a 
year  previous  to  reorganization,  with  details  of  receipts  and  ex- 
penditures, and  a  balance  sheet.  The  exchange  recommends 
that  a  trust  company  act  as  trustee  of 'trust  deeds  or  mortgages. 
Business  corporations  must  submit  counsel's  opinion  on  the 
legality  of  their  organization  and  of  the  issue  of  their  securities. 
Trusts  or  consolidated  businesses  must  give  in  statements  of  the 
financial  and  physical  condition  of  their  constituent  companies 
and  properties,  including  descriptions  of  property,  real,  personal 
and  leased ;  proof  that  the  real  estate  is  free  and  clear  except  as 
to  stated  liens;  a  report  of  reliable  expert  accountants,  exhibit- 
ing the  results  of  business  each  year  for  at  least  two  consecutive 
years,  if  possible,  and  a  balance-sheet.  They  shall  also  state  the 
powers  of  the  directors  as  defined  by  the  articles  of  association, 
furnish  an  agreement  that  the  companies  resulting  from  con- 
solidation will  not  dispose  of  their  interests  in  the  constituent 
companies  without  authorization  by  stockholders,  and  publish 
at  least  once  a  year  a  sufficiently  detailed  statement  of  income 
and  expenditures  for  the  preceding  year  and  the  balance-sheet 
for  the  preceding  fiscal  year.  All  active  stocks  must  be  registered 
at  some  trust  company  or  other  satisfactory  place,  and  the  regis- 
trar must  state  the  amount  of  stock  registered  at  the  time  of 
application.  It  is  also  recommended  to  the  corporations  whose 
securities  are  listed  that  they  publish  to  their  stockholders  at 
least  fifteen  days  before  annual  meetings  a  full  report  of  their 
operations  during  the  preceding  fiscal  year,  with  complete  de- 
tailed statements  of  all  income  and  expenditures,  and  a  balance- 
sheet  showing  their  financial  condition  at  the  close  of  the  given 
period.  The  stock  exchange  does  everything  in  its  power  to  ac- 
complish a  proper  publicity  in  respect  to  the  corporations  whose 
securities  it  admits.  Corporations  which  are  unable  or  unwilling 
to  comply  with  the  requirements  for  admission  to  the  listed  de- 
partment may  have  their  stocks  admitted  to  the  unlisted  depart- 


FORMATION  AND  ORGANIZATION  OF  A  PRIVATE  CORPORATION.      Gl 

ment  of  the  stock  exchange  by  making  application  and  furnish- 
ing such  information  as  is  necessary  to  get  into  this  department. 
The  requirements  necessary  to  be  admitted  to  the  unlisted  de- 
partment are,  of  course,  not  so  strict  as  those  of  the  other,  and 
in  consequence  the  general  line  of  unlisted  securities  do  not 
stand  so  high  as  collateral  among  the  banks.  (See,  in  the  ap- 
pendix, rules  of  the  New  York  Stock  Exchange  pertaining  to 
listed  and  unlisted  securities.)  On  the  New  York  Stock  Ex- 
change there  are  over  1,200  listed  stocks  and  bonds,  representing 
a  total  amount  at  par  value  of  about  $13,800,000,000  in  round 
numbers,  and  about  seventy  unlisted  securities,  representing 
about  one  and  a  quarter  billion  of  dollars.  Nearly  one-fifth  of 
the  wealth  -of  the  United  States  is  represented  by  securities 
dealt  in  on  the  New  York  Stock  Exchange.  Of  these,  railway  se- 
curities comprise  the  larger  class,  and  manufacturing  and  indus- 
trial securities  are  second.  Stock  exchanges  are  voluntary  as- 
sociations and  are  merely  large  stock  markets  with  an  elaborated 
mechanism  for  carrying  on  easily  and  justly  the  vast  number  of 
transactions  of  their  members.  The  New  York  Stock  Exchange 
is  unincorporated,  has  1,100  members  (dealers  in  securities),  and 
its  objects  are  "to  furnish  exchange  rooms  and  other  facilities 
for  the  convenient  transaction  of  their  business  by  its  members 
as  brokers,  to  maintain  high  standards  of  commercial  honor  and 
integrity  among  its  members,  and  to  promote  and  inculcate  just 
and  equitable  principles  of  trade  and  commerce."  The  securities 
dealt  in  on  the  New  York  Stock  Exchange  are  of  national  in- 
terest and  reputation,  while  those  dealt  in  on  the  exchanges  of 
other  cities  are  mostly  of  local  interest  and  belong  to  local  in- 
dustrial, transportation,  financial  and  other  companies.  Mr. 
Conant  has  said :  "The  fundamental  function  of  the  exchanges 
is  to  give  mobility  to  capital.  Without  them,  the  stock  and 
bonds  of  the  share  company  could  not  be  placed  to  advantage. 
Nobody  would  know  on  any  given  day  what  their  value  was, 
because  the  transactions  in  them,  if  they  occurred,  would  be 
private  and  unrecorded.  The  opportunities  for  fraud  would  be 
multiplied  a  hundredfold  as  compared  with  the  publicity  which 
is  given  under  present  conditions  to  the  least  movements  on  the 


62  MODERN   BUSINESS    CORPORATIONS. 

stock  exchange.  The  mobility  for  capital  afforded  by  the  limited 
liability  company  would  be  meager  and  inadequate  if  the  holder 
of  its  bonds  and  shares  did  not  know  that  at  any  moment  he  could 
take  them  to  the  exchanges  and  sell  them  for  a  price.  He  cannot 
be  misled  as  to  this  price,  because  every  newspaper  in  the  land, 
if  the  security  is  one  of  importance,  gives  him  each  morning  the 
value  which  it  possessed  the  day  before  in  the  markets  of  the 
world.  The  holder  of  it  thus  knows  what  the  average  judgment 
of  hundreds  of  men  is  upon  the  value  of  that  security.  If  it  were 
not  thus  quoted  he  would  have  to  rely  upon  the  judgment  of  a 
few  people,  expressing  their  opinion  privately,  and  perhaps  in- 
terested in  misleading  him." 

§  32.    The  Sale  Price  of  Stocks  and  Bonds  with  Reference  to 
Time  of  Issue. 

The  features  preferred  stock  has  in  common  with  bonds  tend 
to  give  an  impression  that  the  dividends  paid  on  such  stock  are 
really  interest  on  the  money  which  was  paid  for  it.  And  espe- 
cially is  this  true  when  the  interest  is  made  cumulative.  As  has 
been  said,  preferred  stock  paying  cumulative  dividends  usually 
entitles  the  holder  to  a  fixed  annual  income  for  a  term  of  years, 
and  repayment  of  his  capital  in  full.  If  the  corporation  meets 
with  reverses,  he  may  still  claim  repayment  of  his  capital  in 
full,  although  the  holders  of  the  common  stock  get  nothing. 
Also,  like  the  bondholder,  the  holder  of  preferred  stock  has 
no  voice  in  the  general  management  of  the  corporation.  But 
neither  the  credit  of  the  company  nor  any  part  of  the  cor- 
poration property  is  pledged  for  the  repayment  of  his  divi- 
dends, nor  of  the  capital  he  has  invested.  He  is,  after  all, 
a  mere  stockholder,  whose  capital  is  risked  in  the  business  of 
the  corporation,  who  can  receive  no  dividends  at  all  until  there 
are  earnings  from  which  to  pay  them,  and  who  cannot  compel 
repayment  of  any  part  of  his  capital  except  upon  distribution 
of  the  corporation  property  after  all  the  debts  of  the  company 
have  been  paid  and  its  affairs  wound  up.  It  follows  that  his 
rights  to  annual,  semi-annual,  or  quarterly  payments  on  his 


FORMATION  AXD  ORGANIZATION  OF  A  PRIVATE  CORPORATION.      63 

stock  is  measured  by  the  rights  and  liabilities  of  a  stockholder 
rather  than  a  bondholder — in  other  words,  that  he  receives  divi- 
dends and  not  interest.  Dividends  are  distinguished  from  in- 
terest in  that  they  are  distributive  shares  in  a  common  fund  that 
has  accumulated  from  earnings,  and  are  not  in  any  sense  com- 
pensation for  the  use  of  money  during  the  time  for  which  they 
are  paid.  The  right  to  dividends  arises  out  of  ownership  of  a 
share  in  a  common  fund,  some  part  of  which  is  to  be  distributed ; 
and  it  makes  no  difference  in  the  owner's  right  whether  he  has 
owned  that  interest  one  month  or  ten  years,  nor  whether  the 
fund  to  be  used  in  paying  dividends  was  accumulated  before  he 
became  a  stockholder  or  afterward.  When  one  views  the  matter 
from  the  standpoint  that  the  unissued  and  treasury  stocks  are 
inert  and  do  not  earn  dividends,  there  seems  to  be  an  apparent 
contradiction  in  the  law.  One  might  think  that  such  stocks, 
tinder  this  theory,  should  share  in  the  dividends  only  from  the 
time  when  they  became  active  in  earning  them.  This  contra- 
diction is  not  real,  since  what  the  corporation  is  selling  is  an 
added  interest  in  the  corporation  property  as  a  whole.  No  part 
of  the  corporation  property  may  be  withheld  from  purchasers 
of  these  stocks,  therefore,  when  any  kind  of  a  distribution  is 
being  made.  If  a  corporation  having  100  outstanding  shares  of 
stock,  of  the  par  value  of  $100  each,  but  owning  $20,000  worth 
of  property,  were  to  sell  and  issue  another  100  shares,  and  the 
next  week  declare  a  dividend  to  be  paid  from  the  $20,000  sur- 
plus that  was  in  its  treasury,  every  purchaser  of  a  new  share 
would  be  entitled  to  share  equally  in  this  dividend  with  the 
holders  of  the  old  shares.  He  would  be  entitled  to  it  because  his 
share  carried  with  it  the  ownership  of  a  two-hundredth  part  of 
all  the  corporation  owned.  Preferred  stock,  like  common  stock^ 
may  be  either  unissued  or  treasury  stock,  and,  when  sold,  draws 
dividends,  as  has  been  said,  and  not  interest ;  therefore  the  share- 
holders must  share  equally  in  any  fund  available  for  paying 
dividends,  when  a  dividend  is  declared,  without  regard  to  the 
length  of  time  the  stock  has  been  held.  The  rule  as  to  bonds 
issued  by  such  a  corporation  would  be  different.  The  interest 
paid  to  a  bondholder  would  depend  upon  the  length  of  time  his 


64  MODERN   BUSINESS    CORPORATIONS. 

money  had  been  loaned  to  the  corporation,  and  purchasers  of  a 
new  issue  of  bonds  would  not  receive  interest  until  all  arrearages 
of  interest  on  an  old  bond  issue  had  been  paid  in  full.  It  is 
apparent  that  such  inequalities  as  might  arise  between  purchas- 
ers of  stock  who  had  purchased  at  different  times,  would  not 
arise  between  bond  purchasers.  Any  inequalities  resulting  from 
difference  in  the  purchase  time  of  stocks  must  be  adjusted,  if 
at  all,  by  varying  the  price  at  which  subscriptions  for  stock  are 
taken  as  the  time  for  paying  dividends  approaches,  or  in  pro- 
portion to  the  increase  of  surplus  funds  or  additional  values  that 
belong  to  the  earlier  shareholders.  To  cover  accrued  values, 
then,  a  directorate  should  sell  stock  at  such  an  advance  over  the 
original  price  as  will  not  cause  a  loss  to  the  original  purchasers. 
For  instance,  if  a  corporation  has  increased  in  value  25  per  cent., 
and  the  directors  determine  to  sell  additional  unissued  or  treas- 
ury stock,  25  per  cent,  should  be  added  to  the  original  price  in 
order  that  those  who  came  in  may  contribute  their  share  to  the 
surplus  value,  and  not,  by  their  entrance  into  the  corporation, 
impair  the  increased  value  of  the  corporate  property. 

Public  stock  market  practices  are  as  follows :  Stocks  are  ordi- 
narily sold  at  a  "flat"  price ;  that  is,  at  a  given  figure  represent- 
ing the  market  value  determined  without  reference  to  dividend 
paying  time,  including  the  accrued  dividends.  Bonds,  except- 
ing government  bonds,  which  are  quoted  flat,  are  sold  at  a  given 
price  without  accrued  interest  being  taken  into  account  in  the 
quotation.  The  accrued  interest  is  to  be  added  to  the  quoted 
price  and  paid  in  addition.  The  dividend  on  stocks  goes  to  the 
owner  of  the  stock  whose  name  appears  on  the  books  of  the  cor- 
poration. Stocks  are  sold  "ex-dividend";  that  is,  without  divi- 
dend, after  the  dividend  has  been  declared  and  the  transfer 
book  of  the  corporation  has  been  closed  for  the  dividend  pay- 
ment. A  stock  sold  ex-dividend  does  not,  of  course,  carry  with 
it  to  the  buyer  the  dividend  recently  declared.  On  an  advertised 
day,  a  given  time  before  the  day  for  dividend  payment,  the 
transfer  book  closes,  and  no  more  changes  in  stock  ownership 
are  recorded,  the  dividends  being  paid  to  the  stockholders  of 
record  the  day  previous  to  the  advertised  day.  The  ex-dividend 


FORMATION  AND  ORGANIZATION  OF  A  PRIVATE  CORPORATION.      65 

quotation  on  a  stock  exchange  is  usually  the  price  of  the  stock 
just  before  the  closing  of  the  transfer  book  of  the  corporation 
soon  to  pay  the  dividend,  less  the  amount  of  the  dividend.  If 
the  price  of  the  stock  is  150  (a  "dividend  on"  price),  for  in- 
stance, and  the  corporation  books  close  for  a  dividend  of  3  per 
cent,  the  next  quotation  will  be  147,  if  nothing  has  occurred 
besides  the  dividend  payment  to  alter  the  price. 

In  the  beginnings  of  a  corporation,  when  the  stock  is  first  be- 
ing placed,  slight  accrued  values  are  frequently  given  little  at- 
tention, all  persons  coming  in  within  six  months  or  even  within 
almost  a  year  sharing  equally  in  the  profits  without  having  paid 
for  the  profits  accrued.  But  this  only  occurs  where  there  is 
more  necessity  of  placing  the  stock  than  of  being  particular  that 
the  stock  shall  be  placed  equitably. 

The  articles  of  association  of  corporations  sometimes  provide 
that  dividends  on  preferred  stock  shall  be  paid  semi-annually 
from  the  date  of  issue.  For  bookkeeping  convenience,  a  corpora- 
tion about  to  place  preferred  stock  will  issue  to  a  trustee  a  cer- 
tain number  of  shares  in  a  block,  say  250  or  500  shares,  which 
the  trustee  will  transfer  to  purchasers  in  smaller  blocks.  Divi- 
dends are  paid  on  this  stock  from  the  time  it  is  issued  and  the 
trustee  receives  the  selling  price  plus  added  value  on  account  of 
accrued  profits  and  dividends,  the  total  receipts  for  the  stock 
being  turned  over  to  the  corporation  treasury.  Dividend  pay- 
ing on  all  this  preferred  stock  then  comes  at  the  same  time.  If 
all  this  preferred  stock  is  sold  in  the  six  months,  or  if  it  is  con- 
templated that  more  will  be  absorbed  by  purchasers  than  is  left 
over,  another  block  may  be  issued  to  the  trustee  to  cover  the 
probable  demand,  if  there  is  still  more  unissued  preferred  stock 
for  sale. 

§33.    Changing  a  One-Man  Business  or  Partnership  to  a  Cor- 
poration. 

In  making  a  corporation  out  of  a  one-man  business  or  a  part- 
nership, the  general  process  is  the  same  as  when  making  a  cor- 
MOD.  Bus.  CORP. — 5 


66  MODERN   BUSINESS    CORPORATIONS. 

poration  to  build  up  a  new  business.  Since  a  corporation  must 
have  a  minimum  number  of  directors,  say  three,  each  of  whom 
must  usually  have  a  share  of  stock,  the  one-man  business  cannot 
be  turned  into  a  corporation  and  the  one  man  be  permitted 
to  own  all  the  business  as  before.  But  this  is  often  practically 
accomplished  by  selecting  two  members  of  his  family  or  two 
friends,  to  each  of  whom  he  gives  a  share  of  stock,  in  order  to 
make  the  required  number  for  organization,  and  who  in  turn 
assign  the  stock  in  blank  and  return  it  to  the  principal  stock- 
holder, who  keeps  it  deposited  in  his  safe,  or  elsewhere  in  his 
own  possession.  These  persons  are  made  stockholders  of  record 
and  are  then  apparently  qualified  to  act  as  directors.  When  the 
principal  stockholder  desires  a  change,  he  can  take  away  the  stock 
and  disqualify  either  director  by  writing  in  the  name  of  any  per- 
son he  chooses  as  assignee,  and  having  a  new  certificate  issued  to 
that  person  and  the  transfer  recorded  on  the  stock  book.  The 
same  plan  may  be  followed  where  a  partnership  of  two  is  changed 
into  a  corporation  and  a  third  director  is  necessary.  The  cor- 
poration counsel  is  frequently  chosen  as  one  of  the  "dummy" 
directors.  But,  often  as  this  is  done,  it  is  not  an  entirely  safe 
method  of  filling  the  directorate.  The  statutes  of  the  state  under 
which  the  corporation  is  organized  should  be  carefully  exam- 
ined to  find  if  it  is  necessary  for  directors  to  hold  stock  before 
anything  of  the  kind  is  attempted.  Directors  should  usually  be 
bona  fide  holders  of  stock,  and  should  have  paid  money,  property, 
or  proper  services  for  it,  which  fact  should  be  provable.  If  an 
individual  owning  all  the  stock  should  so  fill  his  directorate  with 
persons  who  had  no  real  interest  in  the  business,  when  the  stat- 
utes say  or  imply  that  directors  shall  be  shareholders,  the  courts 
would  hold,  on  proper  presentation  of  the  facts,  that  no  corpora- 
tion existed  and  that  the  owner  was  liable  for  all  debts  incurred 
in  carrying  on  the  business.  The  addition  of  more  capital  to 
extend  the  business,  the  division  of  the  business  into  parts  on 
the  corporate  plan,  or  any  other  legitimate  business  purpose  are 
proper  motives  for  a  corporate  organization,  but  fraud  may  not 
be  accomplished  by  so  organizing.  Business  real  estate,  owned 
by  the  business  persons  organizing  a  corporation,  which  they  in- 


FORMATION  AND  ORGANIZATION  OF  A  PRIVATE  CORPORATION.      67 

tend  shall  belong  to  the  corporation,  will,  of  course,  be  trans- 
ferred by  deed  to  the  corporation,  and  personal  property  should 
be  transferred  by  bill  of  sale  which  accurately  describes  the 
property  transferred  and  includes  an  agreement  that  the  cor- 
poration assumes  the  liabilities  of  the  business  transferred,  if 
that  is  the  plan.  The  procedure  in  changing  such  a  business  to 
a  corporation  is  as  follows :  If  the  old  name  of  the  business  has 
any  particular  value  on  account  of  prestige  and  good  will,  and  is 
adaptable  to  the  new  business  and  is  satisfactory  to  the  stock- 
holders, it  may  be  well  to  use  it  as  it  stands  or  to  arrange  a  recog- 
nizable adaptation  of  it  as  the  name  of  the  corporation.*  Then 
the  formal  incorporation  should  be  made  according  to  plan.  An 
inventory  should  be  made  of  all  properties  which  constitute  the 
assets  of  the  business,  and  then  an  inventory  of  all  the  debts, 
which  constitute  the  liabilities.  Subtract  the  liabilities  from  the 
assets,  which  shows  the  net  value  of  the  business,  and  determine 
what  part  of  this  net  value  belongs  to  each  of  the  individual  part- 
ners, if  it  is  a  partnership  concern.  Formally  transfer  to  the  cor- 
poration all  the  assets  of  the  business,  as  the  inventory  shows 

*  Corporation  names :  H.  C.  McCollum  discusses  "Protection  by 
Equity  of  Corporate  Names  against  Unfair  Competition"  in  the 
Columbia,  Law  Review  (V,  vi,  p.  244).  A  corporation  is  protected 
in  the  use  of  its  name  upon  principles  very  similar  to  those  which 
govern  the  protection  of  trade-marks.  An  individual  as  such  has 
the  right  to  the  use  of  his  own  name  in  his  unincorporated  busi- 
ness, even  though  a  previously  existing  company  has  acquired  a 
valuable  good-will  by  the  use  of  the  same  name.  In  exercising  this 
right,  however,  the  new  competitor  must  act  honestly  and  refrain 
from  any  active  attempts  to  deceive  the  public.  In  granting  relief  the 
circumstances  of  each  case  must  be  considered  and  the  probability 
of  loss  must  be  shown.  Most  authorities  hold  that  fraud  is  neces- 
sary to  support  an  action  based  on  alleged  unfair  competition.  The 
question  on  the  cases  is,  however,  still  an  open  one.  The  strongest 
argument  against  the  majority  of  cases  is  the  analogy  from  trade- 
mark cases.  The  author  contends  for  an  extension  of  those  rules 
to  the  cases  under  discussion,  and  that  a  corporate  name  when 
applied  to  the  services  or  articles  offered  by  the  corporation  stamps 
them  as  acceptable  just  like  a  trade-mark.  Since  fraud  is  usual  in 
such  cases  courts  have  assumed  that  it  is  essential. 


68  MODERN   BUSINESS    CORPORATIONS. 

them,  and  issue  to  the  incorporators  full  paid  stock  for  their 
interests  in  the  business  as  previously  determined.  Finally 
make  the  proper  entries  showing  the  transaction  in  the  stock 
book  of  the  corporation. 

§  34.  Proper  Valuation  of  Private  Business  or  Partnership  As- 
sets, Patents,  and  Other  Property  to  Safely  Constitute  Stock 
Exchanged  for  Them  Full-Paid. 

Since  it  is  the  rule  that  stockholders  are  liable  for  the  amount 
of  unpaid  stock  subscriptions,  it  is  of  importance  for  those  giv- 
ing property  or  services  in  exchange  for  stock  to  know  when 
their  stock  may  be  considered  judicially  to  be  full-paid.  The 
laws  of  the  various  states  differ  to  some  extent,  and  the  laws 
of  the  particular  state  under  which  a  new  corporation  was  or- 
ganized will  necessarily  be  a  subject  of  investigation  by  the  per- 
sons interested.  Usually  the  appraisal  by  a  board  of  directors 
of  the  property  or  services  paid  for  with  stock  is,  in  the  absence 
of  fraud,  conclusive  upon  creditors  of  the  corporation  who  are 
seeking  in  case  of  insolvency  to  enforce  an  alleged  liability  for 
unpaid  stock.  The  modifications  of  this  rule  in  the  parental 
state  of  any  corporation  under  consideration  will  be  matter  for 
inquiry.  In  general,  any  valuation  of  property  or  services  must 
be  reasonable.  Commercial  practice  may  determine  to  a  large 
extent  the  reasonableness  of  valuation  of  property  or  services. 
In  the  case  of  the  transfer  of  property  of  a  one-man  or  partner- 
ship business  to  a  corporation,  for  instance,  a  reasonable  inven- 
tory will  determine  the  value  of  the  tangible  assets.  But  stock 
may  also  be  issued  for  the  good  will  on  the  basis  of  earnings  of 
the  corporation  and  still  be  within  reason.  Take  a  business 
whose  net  tangible  assets  are  worth  $100,000.  Suppose  it  is 
earning  uniformly  from  10  to  15  per  cent,  annually.  Suppose 
the  business  is  to  be  transferred  to  a  corporation  capitalized  at 
$200,000,  $50,000  of  which  stock  is  to  be  paid  in  in  cash  and 
$150,000  in  exchange  for  the  business.  The  holders  of  the 
$150,000  stock  would  be  as  safe  as  against  the  creditors  as  the 
holders  of  the  $50,000  stock  paid  for  in  cash;  for,  though  the 


FORMATION  AND  ORGANIZATION  OF  A  PRIVATE  CORPORATION.       69 

$50,000  above  the  value  of  the  tangible  assets  is  "water"  in  a 
sense,  yet  a  business  that  is  earning  such  per  cents  as  those  men- 
tioned would  be  well  worth  the  $50,000  premium.  If  it  is  de- 
sired to  certify  the  valuation  of  property  and  business  to  the 
fullest  extent,  an  expert  accountant  may  be  employed  to  do  this 
so  far  as  the  books  are  concerned,  and  he  will  probably  employ 
appraisers  familiar  with  the  particular  kinds  of  property  under 
appraisement  to  determine  their  value.  Massachusetts  has  an 
admirable  arrangement  that  the  president,  treasurer,  and  a  ma- 
jority of  directors  must  swear  to  a  statement  giving  a  descrip- 
tion and  the  value  of  property  exchanged  for  stock,  which  the 
commissioner  of  corporations  shall  indorse  with  his  certificate 
as  to  its  fairness,  and  file  with  the  secretary  of  state.  Services 
and  patents  are  subject  to  a  more  arbitrary  valuation  than  prop- 
erty. But,  in  cases  of  any  permitted  exchange  of  property  and 
services  for  stock,  the  valuation  must  be  reasonable  and  without 
fraud.  It  is  safer  to  estimate  the  value  of  property  and  services 
from  the  standpoint  of  their  value  to  the  corporation  rather  than 
from  the  standpoint  of  the  persons  who  sell  or  render  services. 
If  a  valuation  is  fair  and  honest  at  the  time  it  is  made,  subse- 
quent depreciation,  or  the  fact  that  the  value  did  not  prove  to  be 
as  much  as  was  estimated,  need  not  concern  the  one  who  re- 
ceived stock  in  exchange  for  property  or  services. 

§  35.    Stock  Subscriptions. 

At  common  law,  subscriptions  to  the  capital  stock  of  a  cor- 
poration are  binding  as  soon  as  the  total  amount  of  capital  stock 
is  subscribed  and  the  corporation  is  created.  Previous  to  the 
creation  of  the  corporation  the  subscriptions  are  a  continuing 
proposition  to  the  corporation  to  take  stock.  The  creation  of  the 
corporation  is  the  acceptance  of  the  contract  on  the  part  of  the 
corporation  under  ordinary  circumstances,  though  a  corporation 
when  organized  is  not  bound  to  accept  a  subscription.  But  when 
accepted,  a  subscription  is  binding,  provided  the  conditions  at- 
taching to  it,  if  any,  have  been  fulfilled  by  the  corporation.  By 
statute  or  by  agreement  in  the  subscription  contract,  when  per- 


70  MODERN   BUSINESS   CORPORATIONS. 

mitted,  there  may  be  a  clause  which  provides  that  the  subscrip- 
tions shall  be  enforceable  when  a  certain  amount,  given  as  the 
amount  with  which  the  corporation  will  begin  business,  has  been 
subscribed.  Then,  although  the  full  capital  stock  is  not  sub- 
scribed, the  subscriptions  are  due  and  must  be  paid  as  soon  as  this 
amount  is  subscribed  and  the  corporation  is  created.  Subscrip- 
tion contracts  should  be  specific  in  naming  the  par  value  of  the 
shares  subscribed,  whether  they  are  preferred  or  common,  and 
should  include  all  matters  of  moment  to  the  correct  execution  of 
a  contract. 

At  common  law,  a  corporation  may  sue  a  subscriber  on  his 
subscription  agreement  for  non-payment,  whole  or  partial.  The 
statutes  in  addition  generally  permit  the  corporation  to  declare 
a  forfeiture  and  to  sell  stock  for  non-payment ;  but  the  forfeiture 
must  be  brought  about  in  accordance  with  the  provisions  of  the 
statute  or  articles  authorizing  it.  When  a  forfeiture  is  brought 
about  legally,  the  subscriber  is  free  from  further  liability  on  his 
subscription  contract ;  but  a  forfeiture  cannot  be  brought  about 
collusively  to  relieve  the  subscriber  from  such  liability.  In  en- 
forcing the  forfeiture  remedy  for  non-payment,  the  statute 
should  be  closely  followed  in  its  requirements.  The  corporation 
will  elect  which  remedy  it  will  pursue.  After  a  subscription  is 
accepted  and  valid  conditions  are  fulfilled,  a  subscriber  is  a 
stockholder  whether  he  has  paid  his  subscription  or  not,  and  re- 
mains so  until  his  stock  is  legally  forfeited  by  the  corporation 
under  statutory  procedure.  In  England  it  has  been  held  (Li- 
censed Victuallers'  Mutual  Trading  Ass'n.,  ex  parte  Audain,  L. 
K.  42  Ch.  Div.  1,  26  A.  &  E.  C.  C.  217)  that  "underwriting,"  as 
applied  to  shares,  means  "an  agreement  entered  into  before  the 
shares  are  brought  before  the  public,  that,  in  the  event  of  the 
public  not  taking  up  the  whole  of  them  or  the  number  mentioned 
in  the  agreement,  the  underwriter  will,  for  an  agreed  commis- 
sion, take  an  allotment  of  such  part  of  the  shares  as  the  public 
has  not  applied  for,"  and  that  such  an  agreement  may  constitute 
an  application  for  shares  on  which  the  underwriter  is  liable  as 
on  a  common  subscription. 

Assessments  on  share  subscriptions,  when  unpaid,  draw  inter- 


FORMATION  AND  ORGANIZATION  OF  A  PRIVATE  CORPORATION.      71 

est  from  the  time  they  are  due.  The  definition  of  "assessment" 
is,  that  it  is  a  resolution,  generally  passed  by  the  board  of  direc- 
tors of  a  corporation,  that  the  shareholders  shall,  within  a  date 
named,  and  at  a  place  named,  pay  a  certain  percentage  of  their 
share  subscriptions;  and  the  notice  of  this  resolution  communi- 
cated to  the  shareholders  is  a  "call"  (Seymour  D.  Thompson,  10 
Cyc.  496).  The  law  relative  to  notice  of  assessments  in  the  sev- 
eral states  should  be  complied  with  in  order  to  enforce  subscrip- 
tions. 

(See  Stock  Subscription  Book.) 


PART  III. 

CHARTER,  ARTICLES,  BY-LAWS,  AND  RULES  OF 
ORDER. 


73 


CHARTER,  ARTICLES,  BY-LAWS,  AND  RULES  OF  ORDER. 

§  36.  The  Charter  and  Articles  of  Association. 

37.  The  Purposes  for  Which  a  Corporation  is  Formed. 

38.  Powers  Common  to  all  Corporations. 

39.  Ultra  Vires  Acts. 

40.  Amendment  of  Charter  and  Articles. 

41.  Irregular  Incorporation. 

42.  Forfeiture  of  Charter  by  Non-User. 

43.  The  Beginning  of  the  Existence  of  a  Corporation. 

44.  By-Laws. 

45.  Rules  of  Order. 

§  36.    THE  CHARTER  AND  ARTICLES  OF  ASSOCIATION. 

A  private  corporation  cannot  be  created  by  mere  agreement  of 
members.  It  can  only  be  created  by  the  state  through  authority 
of  the  legislature.  This  legislative  authority,  contained  in  the 
acts  by  which  a  corporation  is  given  power  to  exist  and  perform 
its  functions,  constitutes  the  charter.  It  is  taken  advantage 
of  by  a  certificate  of  the  intention  of  the  proper  number  of 
qualified  persons  to  exercise  the  right  to  do  business  as  a  corpora- 
tion, called  the  articles  of  association  of  the  corporators,  in 
which  are  set  forth  the  main  purpose  of  the  corporation  and  the 
auxiliary  purposes  and  powers  which  the  corporation  has  a  right 
to  under  the  law  and  which  it  wishes  to  use,  and  such  other  es- 
sential information  as  the  corporate  name,  the  amount  of  capital 
stock,  the  number  of  shares  into  which  the  capital  stock  is  di- 
vided, the  place  of  business,  a  description  of  the  corporate  seal, 
the  duration  of  the  corporation,  the  number  of  directors,  and 
any  other  matters  which  the  statutes  require  or  the  corporators 
desire  and  have  the  right  to  make  a  part  of  the  fundamental  law 
governing  their  body.  The  contents  of  articles  vary  with  the 
statutory  requirements  of  the  different  states.  The  preparation 
of  articles  can  only  be  attended  to  properly  by  a  competent 

75 


76  MODERN   BUSINESS    CORPORATIONS. 

lawyer.  After  they  have  been  written,  and  all  desired  changes 
have  been  made  in  them,,  the  articles  of  incorporation  must  be 
signed  and  acknowledged  before  a  notary  public  or  other  quali- 
fied officer  by  the  persons  who  are  the  corporators.  If  they  are 
made  in  proper  form  and  are  properly  executed,  incorporation  re- 
sults as  a  matter  of  course,  the  articles  having  been  filed  with  the 
proper  officer,  generally  the  secretary  of  state,  and  the  fees  hav- 
ing been  paid  into  the  state  treasury.  Then  the  legal  rights  of 
the  corporation  are  complete  and  it  may  perfect  its  organization 
and  begin  business.  Sometimes  a  minimum  amount  of  paid-up 
capital  is  required  before  the  corporation  can  begin  business,  and 
in  cases  where  this  is  so  the  corporation  must  have  had  paid  into 
its  treasury  this  minimum  amount  before  it  is  fully  qualified. 
Also,  in  some  states  it  is  required  that  a  duplicate  copy  of  the 
articles  of  association  be  filed  with  the  clerk  of  the  county  in 
which  the  principal  office  of  the  company  is  located.  A  certified 
copy  of  the  articles  will  be  furnished  by  the  secretary  of  state 
for  a  small  fee.  The  articles  of  association  are  oftentimes  called 
the  charter. 

§  37.    THE  PUBPOSES  FOR  WHICH  A  CORPORATION  IS 

FORMED. 

The  purposes  set  forth  in  the  articles  must  be  such  as  the  law 
of  the  state  permits.  They  are  not  usually  confined  to  one  spe- 
cific business.  The  wording  of  the  statutes  is  general,  and  is 
given  a  liberal  construction  by  the  courts.  One  principal  busi- 
ness and  many  auxiliary  businesses,  carried  on  incidental  to  the 
principal  business,  may  be  permitted.  But,  as  a  rule,  the  aux- 
iliary purposes  must  not  extend  to  banking,  insurance,  steam 
railway  transportation,  and  certain  other  businesses  that  have  a 
close  relation  to  the  public  welfare,  for  these  businesses  must  be 
organized  under  special  laws  under  which  special  qualifications 
are  usually  imposed.  As  the  purposes  for  which  a  corporation 
was  organized  must  be  determined  by  the  statement  in  the  ar- 
ticles of  incorporation,  they  sometimes  are  set  forth  at  great 
length.  All  the  latitude  the  company  desires  and  has  a  right 


CHARTER,   ARTICLES   AND   BY-LAWS.  77 

to  under  the  law,  in  the  way  of  purposes  and  powers,  should  be 
expressed  in  the  articles. 

§  38.    POWERS  COMMON  TO  ALL  CORPORATIONS. 

There  are  certain  powers  inherent  in  every  corporation 
whether  they  are  mentioned  in  the  charter  or  not.  A  corpora- 
tion is  a  legal  person  separate  from  the  stockholders,  therefore 
it  has  the  right  to  sue  and  be  sued  under  its  corporate  name.  This 
power  saves  the  exhibition  of  the  names  of  its  members  as  par- 
ties to  litigation.  In  order  to  forward  the  purposes  of  organi- 
zation it  is  necessary  that  a  corporation  have  the  right  to  ac- 
quire, hold  and  convey  property.  Except,  that  sometimes 
the  amount  of  property  it  can  hold  is  limited;  and  sometimes 
corporations  are  excluded  from  the  power  of  holding  stock  in 
other  corporations,  and  again,  to  enjoy  the  power  of  holding 
stock,  they  are  sometimes  required  to  mention  in  the  articles 
the  intended  use  of  the  power.  A  corporation  has  the  right  to 
have  officers,  directors,  or  trustees,  and  agents,  and  to  make  by- 
laws. A  charter  is  commonly  expressed  in  general  terms  and  com- 
prehends the  general  rules  governing  the  policy  of  the  incorpora- 
tion. The  rules  governing  the  action  of  the  officers,  directors, 
and  managers,  and  other  incidentals,  are  expressed  in  such  de- 
tail as  desired  in  the  by-laws.  The  corporation  may  also  use  a 
seal  and  may  "do  all  things  necessary/'  an  expression  used  to 
cover  acts  not  expressed  specifically  which  are  not  always  in- 
herent corporate  rights,  but  which  may,  under  the  provision, 
become  so  in  a  particular  case.  By  action  of  the  stockholders,  a 
corporation  has  the  power  to  terminate  its  existence,  or  dissolve. 
These  are  powers  all  corporations  have  in  common,  without  spe- 
cial provision  in  the  articles.  The  special  powers  granted  the 
corporations  are  such  as  the  statutes  provide  and  as  are  men- 
tioned in  the  articles  of  incorporation  as  purposes  and  rights 
intended  to  be  pursued  by  the  company. 

§  39.    ULTRA  VIRES  ACTS. 

Whatever  a  corporation  does  that  is  beyond  a  judicial  interpre- 


78  MODERN   BUSINESS   CORPORATIONS. 

tation  of  its  powers  as  provided  in  its  charter  is,  in  the  language 
of  the  law,  ultra  vires  (beyond  power).  A  corporation  guilty  of 
ultra  vires  acts  may  forfeit  its  charter,  or  it  may  only  be  re- 
strained from  exercising  the  powers  which  it  has  assumed  and 
to  which  it  has  no  right.  The  former  punishment  is  usually  im- 
posed only  when  the  act  is  sufficiently  important  to  affect  the 
public  interests,  or  when  a  statute  specifically  provides  that 
certain  acts  shall  be  punished  by  forfeiture  of  the  charter.  If 
a  corporation  violates  its  charter,  or  does  not  perform  its  cor- 
porate duties  in  material  and  important  particulars,  it  is  sub- 
ject merely  to  regulation  by  law.  As  a  matter  of  fact  corpora- 
tions frequently  do  things  which  are  not  provided  for  in  the 
charter,  but  the  state  does  not  act  so  long  as  private  persons  only 
are  affected.  The  strict  interpretation  and  enforcement  of  the 
ultra  vires  doctrine  is  adhered  to  in  the  federal  courts,  but  state 
courts  have  contemplated  it  more  liberally.  The  latter  hold 
that  an  ultra  vires  contract  is  not  illegal  and  void  because  of 
want  of  authority,  and  that  if  the  contract  is  founded  on  a  good 
consideration  and  is  not  void  on  account  of  statutory  prohibi- 
tion, it  is  voidable  only,  and  may  give  rights  of  action.  It  has 
been  held  that  "the  plea  of  ultra  vires  should  not  as  a  general 
rule  prevail,  whether  it  is  interposed  for  or  against  the  corpora- 
tion, when  it  would  not  advance  justice,  but  on  the  contrary 
would  accomplish  a  legal  wrong/5  The  doctrine  of  estoppel  will 
be  interposed  against  rights  of  action  or  of  defense  on  the  ground 
of  ultra  vires  when  corporations  or  persons  have  so  acted  that 
the  defense  on  this  ground  would  be  inequitable.  Owing  to  the 
wide  scope  of  powers  now  permitted  in  charters  and  the  liberal 
modification  of  the  doctrine  of  ultra  vires  on  the  part  of  the 
state  courts,  the  doctrine  in  its  application  to  private  corpora- 
tions is  not  so  important  as  it  was  formerly.  Notwithstanding, 
those  who  manage  corporations  should  consider  all  they  wish  to 
do,  and  in  doing  things  of  importance  should  be  sure  they  have 
the  authority  of  their  charter  to  do  them.  When  the  articles 
do  not  provide  for  the  performance  of  certain  acts,  and  it  is 
desirable  that  they  should  so  provide,  they  may  be  amended  to  in- 
clude the  powers  wanting,  if  the  statutes  will  permit  those  acts. 


CHARTER,  ARTICLES   AND  BY-LAWS.  79 

.   AMENDMENT  OF  CHARTER  AND  ARTICLES. 

Since  the  charter  of  a  corporation  is  the  law  under  which  a 
corporation  is  organized,  it  follows  that  the  right  to  amend,  alter, 
or  repeal  a  charter  belongs  only  to  the  state.  There  is  no  such 
thing,  strictly  speaking,  as  amending  a  charter  by  action  of  the 
stockholders  of  a  corporation.  The  stockholders,  in  changing 
their  articles  of  incorporation,  are  merely  making  a  variation  in 
certain  incidentals  which  they  have  a  right  to  vary,  add  to,  or 
subtract  from  the  charter  (the  laws)  already  provided.  When 
a  corporation  is  organized  according  to  law,  it  has  the  right  to 
use  the  powers  and  privileges  conferred  upon  it  by  the  laws  in 
force  when  it  came  into  existence.  The  constitution  of  the 
United  States  protects  it  in  this  right  by  prohibiting  all  legis- 
lation which  impairs  the  obligation  of  contracts.  An  amendment 
or  alteration  of  a  charter  that  cannot  legally  be  imposed  on  a 
corporation  by  a  state  legislature,  may  be  offered  to  the  stock- 
holders for  acceptance  or  rejection,  and  their  action  is  conclu- 
sive. If  the  proposed  amendment  will  effect  a  radical  change  in 
the  plan  and  purpose  of  a  corporation,  it  can  be  accepted  only 
by  unanimous  vote  of  the  stockholders;  if  the  change  is  merely 
incidental,  a  majority  of  the  stockholders  are  empowered  to  ac- 
cept it.  If  the  state  has  a  legal  right  to  alter  or  amend  a  charter, 
a  corporation  has  the  alternative  of  accepting  the  change  or  of 
going  out  of  existence.  But,  as  said,  the  state  cannot,  on  account 
of  its  reservation  of  a  right  to  change  a  charter,  cancel  rights 
which  have  become  vested  in  a  corporation.  The  power  of  the 
state  is  used  in  controlling  corporations  in  keeping  them  within 
the  bounds  of  the  powers  and  privileges  conferrable  and  con- 
ferred by  law.  The  state's  power  to  repeal,  suspend,  alter,  or 
amend  does  not  extend  either  to  taking  away  permanently  or 
temporarily  rights  granted  before,  nor  to  the  substitution  of 
different  rights.  The  nature  and  purpose  of  the  corporation,  as 
legally  formed,  must  remain  intact.  A  state  may  have  many 
legislative  acts  under  which  corporations  may  be  organized.  The 
specification  of  powers  granted  by  these  acts  imply  the  exclusion 
of  powers  not  specified.  So,  a  corporation  for  a  given  purpose 


80  MODERN   BUSINESS   CORPORATIONS. 

might  be  organized  under  any  one  of  several  different  acts  which 
provide  for  that  purpose.  The  choice  of  the  act  under  which  the 
corporation  shall  be  organized  will  depend  upon  provisions  con- 
forming most  nearly  with  the  main  purpose  of  this  particular 
organization,  taken  in  connection  with  the  auxiliary  purposes 
that  pertain  to  its  business.  The  wording  of  articles  to  fit  the 
act  under  which  they  are  made  is  an  important  matter.  The 
act  may  specify  certain  purposes  and  powers  either  disjunctively 
or  inclusively,  the  powers  conferrable  under  the  act  being  con- 
ferrable  only  severally,  so  that  no  one  corporation  may  have  all 
the  powers,  or  they  may  be  conferrable  jointly  so  that  one  cor- 
poration may  exercise  all  the  powers.  Eemembering  the  state's 
right  to  interfere  with  the  corporation  if  it  is  not  organized  le- 
gally, the  necessity  of  employing  a  lawyer  to  draft  the  articles 
is  evident  as  a  business  precaution.  From  the  standpoint  of 
changes  in  the  articles  by  stockholders,  after  the  corporation  has 
been  created,  the  alterations  consist  usually  in  changing  the  cor- 
porate name,  changing  the  amount  and  kind  of  capital  stock, 
the  limitation  or  extension  of  the  business  purposes,  changing 
the  number  of  directors,  etc.,  within  the  limitation  of  rights 
which  the  act  has  provided.  But  the  essential  character  and  pur- 
pose of  the  corporation  is  not  changed  thereby.  A  corporation 
may  sometimes  change  its  character  and  purpose  almost  entirely 
by  taking  advantage  of  legislative  acts  which  the  states  some- 
times provide,  whereby  the  state  offers  the  corporation  certain 
powers  not  conferred  in  the  act  under  which  the  corporation  was 
organized.  This  is,  in  effect,  an  offer  by  the  state  of  an  optional 
amendment  to  the  charter  already  conferred,  which  the  cor- 
poration may  accept  by  complying  with  the  requirements  of  the 
statute  offering  the  amendment.  Of  course,  a  corporation  may 
dissolve  and  the  same  business  and  people  may  reorganize  under 
another  statute,  but  such  procedure  destroys  the  old  corporation 
entirely  and  makes  a  new  one,  so  far  as  the  law  is  concerned.  The 
steps  necessary  to  change  the  articles  of  incorporation  by  action 
of  the  stockholders  vary  in  the  different  states.  For  instance, 
New  York  laws  provide  that  a  corporation  may  change  its  name 
by  publishing  for  six  weeks  a  notice  of  intention  to  change  and 


CHARTER,   ARTICLES   AND  BY-LAWS.  81 

by  application  to  the  supreme  court  for  an  order  authorizing  the 
change ;  that  the  purposes  and  powers  of  the  corporation  may  be 
altered  by  a  vote  of  three-fifths  of  the  capital  stock;  that  the 
number  of  shares  into  which  the  capital  stock  is  divided  may  be 
increased  or  decreased  by  vote  of  two-thirds  of  the  capital  stock ; 
that  the  amount  of  the  capital  stock  may  be  increased  or  reduced 
by  concurring  vote  of  the  stockholders  holding  a  majority  of  the 
stock.  Arizona  laws  provide  that  any  proper  amendment  may 
be  made  by  the  concurring  vote  of  a  majority  of  the  stock.  The 
amendment  of  the  articles  by  stockholders  usually  requires  as 
much  formality  as  preparing  and  filing  the  original  articles,  and 
should  be  attended  to  by  a  competent  lawyer.  Certificates  and 
documents  in  evidence  of  authorized  changes,  made  by  the  proper 
officers  of  the  corporation,  or  other  authorities,  must  be  filed  with 
the  same  state  or  local  officers  that  were  legal  custodians  of  the 
original  articles,  and,  perhaps,  must  be  given  publicity  by  publi- 
cation. The  formalities  may  vary  with  the  nature  of  the  amend- 
ment, and  they  may  vary  in  different  states  with  the  same  kind  of 
amendment.  Small  state  fees  are  usually  charged  when  amend- 
ments to  articles  are  filed.  The  action  of  directors  is  sometimes 
an  amendment  of  the  articles.  Though  the  location  of  the  princi- 
pal office  be  specified  in  the  articles,  the  New  Jersey  law  provides 
that  a  concurring  vote  of  two-thirds  of  the  directors  shall  be 
sufficient  to  move  the  office  from  a  town,  township,  or  city  to 
some  other  such  location.  A  properly  certified  copy  of  the  reso- 
lution must  be  filed  with  the  secretary  of  state  and  a  fee  of  $5.00 
must  be  paid.  Amendments  may  originate  with  the  state  as 
shown,  or,  in  connection  with  more  common  business  routine, 
with  the  directors  or  stockholders.  Amendments  may  be  con- 
sidered at  a  regular  meeting  of  directors  or  stockholders,  the 
time  of  which  is  specified  in  the  by-laws,  or  the  by-laws  of  a  cor- 
poration may  provide  that  a  special  meeting  may  be  called ;  in 
the  case  of  a  directors'  meeting,  by  a  call  of  the  president  of  the 
corporation  or  a  certain  number  of  the  directors,  or,  in  case  of  a 
stockholders'  meeting,  on  call,  usually,  of  stockholders  holding  a 
majority  of  stock.  Amendments  may  be  proposed  and  carried  or 
MOD.  Bus.  CORP. — 6 


82  MODERN   BUSINESS   CORPORATIONS. 

vetoed  in  the  manner  provided  in  the  statutes  of  the  state  under 
which  the  corporation  is  organized. 

§41.    IRREGULAR  INCORPORATION. 

No  corporation  is  created  if  there  are  no  articles  or  if  the  ar- 
ticles are  essentially  defective  in  complying  with  the  corpora- 
tion statutes  of  the  state  under  whose  laws  the  organizers  are 
seeking  to  form  their  company.  The  language  of  the  law  is 
that  there  shall  be  a  substantial  compliance  with  all  the  terms 
of  the  general  incorporation  law. 

§  42.    FORFEITURE  OF  CHARTER  BY  NON-USER. 

If  a  corporation  does  not  begin  business  or  the  exercise  of  its 
corporate  purposes  within  a  certain  period,  which  varies  in  dif- 
ferent states,  it  usually  forfeits  its  charter  and  its  corporate  pow- 
ers cease. 

§  43.    THE  BEGINNING  OF  THE  EXISTENCE  OF  A  COR- 
PORATION. 

A  corporation  exists  from  the  time  the  articles  are  executed, 
recorded,  or  filed  for  record,  or  are  approved  by  a  public  official 
or  from  any  other  time  the  statutes  of  the  various  states  provide. 
The  persons  interested  in  it  may  have  begun  business  before  the 
conditions  precedent  to  a  complete  organization  had  been  com- 
plied with,  and  they  are  then  liable  as  partners  for  the  debts  of 
the  business  until  the  corporation  assumes  the  debts.  No  busi- 
ness as  a  corporation  can  be  done  until  all  the  .statutory  provi- 
sions for  the  organization  are  complied  with.  The  legal  exist- 
ence of  a  corporation  is  not  terminated,  however,  by  a  violation 
of  its  charter  by  beginning  business  before  the  conditions  prece- 
dent to  a  legal  existence  are  complied  with. 

§44.   BY-LAWS. 

By-laws  are  the  general  working  rules  adopted  for  the  internal 
government  of  a  corporation.  They  regulate  the  conduct  of  the 


CHARTER,   ARTICLES   AND   BY-LAWS.  83 

corporation  and  define  the  duties  and  rights  of  members  of  the 
corporation  toward  the  corporation  and  among  themselves.  They 
apply  to  those  discretionary  and  prudential  matters  of  corporate 
and  business  conduct  that  are  not  regulated  by  statutory  law  or 
the  corporation's  charter.  By-laws  are  of  a  somewhat  permanent 
nature,  in  which  they  differ  from  resolutions  and  motions,  which 
have  reference  to  temporary  and  particular  occasions  and  ex- 
igencies. By-laws  must,  of  course,  not  disagree  with  the  law  of 
the  land,  common,  constitutional,  nor  statutory,  nor  with  the  cor- 
poration's articles,  and  they  must  be  reasonable  and .  equitable ; 
that  is,  they  must  make  no  provisions  that  are  in  effect  against 
public  policy,  or  an  injustice  to  any  members  of  the  corporation. 
The  by-laws  may  modify  the  articles,  but  they  cannot  alter  them. 
They  should  state  clearly  and  succinctly  what  they  provide  and 
should  not  be  a  mere  repetition  of  the  provisions  of  the  articles 
of  association.  They  should  be  made  with  care  and  deliberation, 
for  wise  by-laws  may  greatly  facilitate  the  government  and  man- 
agement of  a  corporation  and  unwise  by-laws  may  seriously  im- 
pede these  functions.  They  may  prevent  careless  and  impolitic 
actions  on  the  part  of  officers  and  directors,  or  they  may  inter- 
fere with  their  liberty  of  action  to  a  detrimental  extent.  The  size 
of  the  corporation  and  the  degree  of  intimacy  of  the  officers  and 
directors  with  the  business  will  determine  largely  the  necessity 
of  detail  into  which  the  by-laws  shall  go.  If  the  stock  is  held 
by  a  few  persons  who  are  officers  and  directors,  and  who  meet 
often  or  conduct  the  business  themselves  the  by-laws  will  be  few 
and  simple.  But  in  an  intricate  business,  where  stockholders- 
and  directors  are  many  and  meet  seldom,  where  the  officers  are 
not  superintending  the  business  closely,  where  the  management 
is  in  the  hands  of  employes,  the  by-laws  should  cover  all  matters 
of  importance  to  the  internal  regulation  of  the  corporation's  af- 
fairs. Where  there  are  statutory  provisions  regulating  corpora- 
tion management,  these  may  be  included  in  the  by-laws  to  make 
the  provisions  more  familiar  to  members  of  the  corporation.  The 
by-laws  should  be  grouped  according  to  application ;  for  instance, 
in  the  order  of  the  usual  priority  of  matters  with  which  the  cor- 
porate management  is  concerned,  (1)  stock;  (2)  stockholders; 


84  MODERN   BUSINESS    CORPORATIONS. 

(3)  directors;  (4)  officers;  (5)  finance  and  dividends;  (6)  mis- 
cellaneous. In  large  and  intricate  companies  the  corporation 
counsel  usually  drafts  the  by-laws,  as  well  as  the  articles  of  as- 
sociation. It  has  been  held  that  all  business  rules  and  regula- 
tions of  a  corporation  which  do  not  affect  third  persons  come 
within  the  meaning  of  by-laws.  Properly  constructed  and  au- 
thorized by-laws  are  binding  on  all  of  the  members  of  a  cor- 
poration alike.  Members  are  supposed  to  know  the  by-laws,  and 
their  assent  to  the  by-laws  is  presumed  on  account  of  their  be- 
coming members,  whether  they  did  or  did  not  know  of  the  exist- 
ence of  by-laws.  By-laws  are  binding  upon  officers  of  a  cor- 
poration whether  they  be  stockholders  or  not,  but  it  is  the  rule 
that  they  are  not  binding  on  third  persons  who  have  no  connec- 
tion with  the  company.  Illegal  by-laws  are  not  binding.  Since 
the  courts  do  not  take  judicial  notice  of  by-laws  as  they  do  of 
public  statutes,  in  litigation  involving  the  provisions  of  by-laws, 
the  by-laws  must  be  produced  in  court  and  proved,  if  they  are 
written,  or  their  adoption  may  be  proved  by  oral  evidence,  if 
they  have  not  been  formally  recorded. 

When  a  company  has  been  created,  the  first  corporate  action 
is  a  meeting  of  the  stockholders  for  the  purpose  of  adopting 
by-laws,  electing  directors,  and  attending  to  other  corporate 
business.  Sometimes  the  directors  of  the  corporation  for  the 
first  year  are  named  in  the  articles  of  association,  and  some- 
times the  stockholders  at  their  first  meeting  authorize  the  di- 
rectors to  compose  and  adopt  the  by-laws,  if  there  is  no  previous 
arrangement  in  the  articles  or  in  the  statutory  law.  As  stock- 
holders do  not, ordinarily  have  the  right  of  direct  participation 
in  the  business  management  of  a  corporation  (the  right  belongs 
to  the  directors  and  officers),  it  is  better  for  them  to  provide 
such  general  rules  of  management,  by-laws,  as  they  desire  the 
directors  and  officers  to  follow.  Of  course,  when  there  are  only 
a  few  stockholders  who  are  also  the  directors  and  officers,  this 
is  not  important.  The  stockholders  (a  majority)  have  the  right 
to  make  by-laws  unless  statutory  law  or  the  articles  of  associa- 
tion declare  otherwise,  or  unless  the  stockholders  have  given  the 
right  to  the  directors,  in  which  case  it  is  implied  the  stock- 


CHARTER,   ARTICLES   AND   BY-LAWS.  85 

holders  surrender  the  right.  If  the  stockholders  pass  by-laws 
limiting  the  power  of  directors,  such  by-laws  are  binding  upon 
the  directors  as  are  the  articles  of  association  and  the  state 
law.  If  the  stockholders  give  the  directors  general  author- 
ity to  pass  by-laws  the  directors  cannot  alter  those  made  by  the 
stockholders  in  limitation  of  the  directors'  power.  Directors 
have  no  power  to  modify  or  violate  stockholders'  by-laws,  unless 
the  articles  so  provide,  but  they  may  waive  or  modify  those  made 
by  themselves.  The  reason  for  giving  statutory  permission  (New 
Jersey)  to  the  directors  primarily  to  make  by-laws  is  that,  in 
large  corporations  where  the  stockholders  are  numerous  and 
scattered,  it  is  thought  desirable  that  the  directors  have  more 
liberty  than  they  are  allowed  under  the  common  law,  or  were 
allowed  under  statutory  law  till  the  New  Jersey  law  was  passed. 
This  unusual  liberty  granted  to  the  directors  is  not  one  of  the 
prudent  developments  of  the  later  corporation  legislation,  al- 
though power  is  given  the  stockholders  to  alter  or  repeal  the  di- 
rectors' by-laws.  In  all  corporations  where  the  stockholders 
can  be  easily  assembled  it  is  much  better  for  the  stockholders  to 
retain  the  right  of  making  by-laws,  unless  the  right  is  given  to 
the  directors  subject  to  by-laws  already  passed  by  the  stock- 
holders. By-laws  may  be  repealed,  added  to,  or  amended  at  any 
time  that  is  necessary  or  desirable.  These  things  are  done  ac- 
cording to  statute,  the  articles,  or  the  by-laws  themselves,  if  spe- 
cial provision  is  made  therein,  or  by  a  majority  of  the  stock- 
holders in  case  of  no  special  provision.  Whatever  authority 
makes  a  by-law  has  the  right  to  repeal  or  amend  it,  and  amend- 
ments have  the  same  force  as  original  by-laws.  Changes  in  by- 
laws cannot  be  made,  however,  where  certain  rights  have  become 
vested  by  virtue  of  the  previous  by-laws.  By-laws  are  sometimes 
not  observed.  By  consent  of  all  the  stockholders,  or  of  the  di- 
rectors, so  far  as  the  by-laws  made  by  them  are  concerned, 
the  by-laws  may  be  waived  when  it  will  facilitate  business  trans- 
actions, and  the  transactions  may  be  conducted  in  any  manner 
the  discretion  of  the  members  may  dictate  so  long  as  they  are 
within  the  provisions  of  the  law  and  the  articles.  Though  by- 
laws are  not  made  to  be  ignored,  in  practice  many  times  they  are 


86  MODERN   BUSINESS   CORPORATIONS. 

violated  and  the  acts  in  violation  are  legalized  by  assent  or  ac- 
quiescence of  the  members.  If  a  stockholder  objects  to  an  ir- 
regularity, he  must  take  steps  to  defeat  the  irregularity,  else  he 
will  be  considered  to  acquiesce,  and  cannot  object  thereafter. 
Unless  a  corporation  is  in  good  financial  condition  and  free 
from  debt,  violation  of  the  by-laws  may  cause  much  inconve- 
nience, and,  perhaps,  litigation.  Stockholders  and  sometimes 
creditors  have  the  right  to  insist  that  the  corporation's  affairs 
shall  be  conducted  according  to  the  articles  and  statutes.  Hence 
the  danger  attending  the  violation  of  the  by-laws  are  a  restraint 
upon  their  non-observance.  Illegal  corporate  action  may  be 
defeated  by  a  stockholder  or  creditor  who  will  take  the  matter  to 
court.  Officers  and  directors  may  also  Become  personally  liable 
on  account  of  such  violations.  Specific  penalties  are  sometimes 
imposed  for  violation  of  the  by-laws,  but  their  use  is  generally 
unsatisfactory.  It  is  better  at  the  first  opportunity  to  displace 
officers  and  directors  who  are  derelict  in  their  duties  than  to 
hedge  them  about  with  fines.  When  penalties  are  reasonable, 
however,  the  courts  will  uphold  them.  It  has  been  provided  by 
statute  (New  Jersey)  that  the  violation  of  a  by-law  may  be  pun- 
ished by  a  fine  of  not  more  than  twenty  dollars.  All  fines  must 
be  certain  and  applicable  to  all  cases  of  a  given  kind.  But  no 
business  corporation  can,  on  the  authority  of  a  by-law,  unless  the 
articles  so  provide  under  statutory  right,  deprive  a  member  of 
a  corporation  of  his  rights  of  membership  or  make  him  forfeit 
his  stock.  Sometimes  there  may  be  a  forfeiture  of  stock  for 
failure  to  pay  calls  and  assessments,  if  the  statutes  so  provide, 
or  if  the  stockholders  consent  and  indorse  on  their  certificates  a 
contract  to  that  effect.  When  stock  is  forfeited  and  a  by-law 
provides  the  manner  of  reversion  and  disposal  of  the  stock,  the 
by-law  must  be  observed,  or  the  transaction  is  illegal.  By-laws 
should  always  be  formally  adopted,  and  should  be  written  com- 
pletely in  the  minute  book.  If  the  corporation  is  large,  copies 
of  the  charter  and  by-laws  should  be  type-written  or  printed  and 
furnished  to  the  stockholders  and  employes  concerned  in  the 
government  or  management  of  the  corporation. 


I 

CHARTER,    ARTICLES    AND   BY-LAWS.  87 


§45.    RULES  OF  ORDER. 

Parliamentary  law  is  that  body  of  recognized  rules  of  parlia- 
mentary and  legislative  assemblies  by  which  their  procedure  is 
regulated.  The  name  "parliamentary  law"  is  taken  from  the  Brit- 
ish Parliament,  on  whose  practice  and  usage  this  law  is  mainly 
founded.  In  the  American  Congress,  such  changes  and  modifica- 
tions have  been  made  in  the  rules  as  will  better  adapt  them  to 
usage  in  this  country.  The  rules  as  used  in  the  highest  delibera- 
tive and  legislative  assemblies  of  a  nation  form  the  basis  for 
procedure  for  state  assemblies,  and  for  minor  public  and  private 
assemblies.  For  the  use  of  the  various  kinds  of  minor  assem- 
blies, including  the  meetings  of  stockholders  and  directors  of 
private  corporations,  such  manuals  of  modified  and  adapted  prac- 
tices as  Roberts'  Rules  of  Order,  Cushing's  Manual,  Reed's  Rules 
of  Order,  etc.,  have  been  devised. 

Rules  of  order  are  what  may  be  called  the  common  law  of  de- 
liberative and  legislative  bodies,  and  the  decisions  of  the  presid- 
ing officers  become  precedents  just  as  do  the  decisions  of  judges 
in  the  courts  of  law.  They  constitute  a  uniform  and  exact 
method  of  determining  the  sense  of  the  assembly  as  expressed 
by  a  resolution,  order,  or  vote.  A  corporation  has  the  right  to 
make  its  own  rules  of  order,  not  in  disregard  of  the  provisions 
of  the  constitution  and  by-laws,  and  to  change  and  suspend  the 
rules  at  will.  It  is  not  unusual  for  a  by-law  to  provide  that 
meetings  of  the  stockholders  and  directors  shall  be  conducted 
according  to  some  hand-book,  such  as  one  of  those  mentioned. 
In  the  absence  of  such  a  by-law,  the  only  requirement  is  that 
those  present  and  entitled  to  vote  at  a  meeting  shall  have  a  rea- 
sonable opportunity  to  present  measures  for  consideration,  to  be 
heard  on  any  measure  presented,  and  to  record  their  votes  in 
favor  of  or  in  opposition  to  those  measures.  Rules  of  order, 
regularly  adopted,  are  necessary  to  those  who  seek  to  rush  a 
measure  through  a  meeting  without  full  discussion,  or  who  wish 
to  prevent  due  consideration  of  a  measure  in  any  manner.  This 
is  because  no  court  will  be  slow  to  set  aside  action  by  the  major- 
ity which  bears  evidence  of  being  a  high-handed  proceeding,  un- 


88  MODERN   BUSINESS   CORPORATIONS. 

less  the  supporters  of  the  action  can  show  affirmatively  that  pro- 
cedure was  according  to  rules  adopted.  The  application  of  rules 
which  prevent  full  consideration  and  expression  by  members 
who  have  authority  to  consider  a  measure  and  to  express  them- 
selves on  it,  is  called  "gag-rule/'  Commonly,  rules  of  order  are 
important  only  as  they  facilitate  the  dispatch  of  business  and 
provide  a  regular  and  orderly  means  of  transacting  it  and  assist 
in  keeping  a  record  of  what  is  done.  If  action  is  taken  by  a 
fair  vote  after  full  discussion  or  the  opportunity  for  full  discus- 
sion, it  will  not  be  set  aside  by  the  courts  for  informality  that 
did  not  violate  any  statute  or  the  by-laws  of  the  corporation. 


PART  IV. 


DIRECTORS  AND  OFFICERS. 


89 


DIRECTORS  AND  OFFICERS. 

§  46.  Numbers,  Qualifications,  Powers,  and  Right  to  Choose  and  Re- 
move. 

47.  Directors'  Meetings. 

48.  The  President. 

49.  The  Vice-President. 

50.  The  Secretary. 

51.  The  Treasurer. 

52.  The  Managing  Director  and  the  General  Manager. 

53.  The  Counsel. 

54.  The  Auditor. 

55.  The  Committees. 

§  46.    Number,  Qualifications,  Powers,  and  Right  to  Choose  and 
Remove. 

After  the  adoption  of  the  by-laws  the  formal  selection  of  direc- 
tors and  of  officers  is  the  next  thing  in  order.  In  many  of  the 
states  the  number  of  directors  is  fixed  within  certain  limits.  For 
instance,  the  laws  of  South  Dakota  provide  that  there  shall  be 
not  fewer  than  three  nor  more  than  eleven  directors.  Most  of 
the  states  provide  that  there  shall  be  not  fewer  than  three  direc- 
tors, but  not  many  prescribe  a  maximum  limit.  For  small  cor- 
porations a  small  board  is  usually  more  effective,  as  well  as  more 
convenient  to  assemble.  The  members  of  a  large  board,  besides 
being  difficult  to  assemble,  may  not  feel  their  personal  responsi- 
bility in  the  management  of  the  corporation  affairs.  Conse- 
quently the  success  of  the  company,  so  far  as  their  supervision 
goes,  is  more  or  less  uncertain,  and  their  duties  are  taken  over 
by  the  officers,  thus  giving  the  officers  more  than  their  proper 
share  of  authority,  or  the  directors  delegate  the  management  to 
an  executive  committee  composed  of  several  members  of  the 
board.  Though  this  is  often  done,  it  is  sometimes  carried  to  an 

91 


92  MODERN   BUSINESS   CORPORATIONS. 

illegal  point,,  as  the  directors  do  not  have  the  power  to  delegate 
the  right  to  exercise  discretion  which  is  vested  in  them. 

In  the  larger  corporations  there  is  often  a  classification  of 
directors  with  regard  to  the  periods  for  which  they  shall  serve. 
Suppose  a  corporation  is  to  have  nine  directors.  At  the  first 
election  three  will  be  elected  to  serve  one  year,  three  to  serve 
two  years,  and  three  to  serve  three  years.  This  will  bring  about 
the  election  of  one-third  of  the  board  every  year.  It  will  be 
noted  that  after  the  first  two  years,  each  of  the  three  divisions 
of  directors  will  serve  three  years.  An  arrangement  of  this  kind 
preserves  to  the  corporation  a  certain  portion  of  the  directors 
who  should  be  reasonably  familiar  with  the  corporation's  busi- 
ness, and  also  tends  to  prevent  radical  changes  in  the  business 
policy.  Directors  serve  until  their  successors  are  elected,  even 
if  it  be  beyond  their  prescribed  terms. 

Any  one  who  may  be  a  corporator  may  be  a  director  or  officer, 
as  there  are  no  special  qualifications  necessary  unless  required 
by  the  statute,  charter,  or  by-laws.  A  director  is,  however,  usually 
required  to  be  a  stockholder.  Non-residents  of  the  domiciliary 
state  of  a  corporation  may  be  directors ;  but  in  some  states  a  cer- 
tain part  of  the  directors  are  required  by  statute  to  be  residents 
of  the  domiciliary  state.  Though  there  are  no  special  legal 
qualifications  for  directors  and  officers,  there  are,  of  course,  spe- 
cial business  qualifications.  Directors  should,  as  far  as  possible, 
be  chosen  from  those  who  are  specially  fitted  by  education  and 
experience  to  manage  the  affairs  of  the  corporation.  Men  of 
good  personal  character  and  high  integrity,  intelligence,  fore- 
sight, energy;  men  with  large  comprehension  and  keen  analyti- 
cal faculties ;  men  who  are  capable  of  looking  at  business  with  an 
unprejudiced  business  eye,  who  reduce  the  personal  equation  to 
the  minimum  and  thus  avoid  dissension;  resourceful  and  rea- 
sonable men  make  by  far  the  best  directors  and  officers. 

The  relation  between  the  corporation,  on  the  one  hand,  and  the 
directors  and  officers  of  the  corporation,  on  the  other  hand,  is  that 
of  principal  and  agent,  and  the  law  of  agency  applies  to  acts  done 
under  this  relation.  It  is  presumed  that  an  officer  or  agent  who 
has  executed  a  contract  or  done  any  act  for  and  in  behalf  of  the 


DIRECTORS  AXD  OFFICERS.  93 

corporation,  has  had  proper  authority,  where  the  act  is  clearly 
within  the  powers  of  his  office  or  agency;  therefore,  proof  of 
such  authority  from  the  corporation  records  is  not  necessary.  All 
such  contracts  made  and  acts  done  bind  the  corporation.  Though 
the  active  general  management  of  the  corporation  belongs  to  the 
directors,  they  have  no  individual  authority  to  act  unless  given 
powers  of  agency,  either  special  or  as  officers,  by  the  board  as  a 
whole.  The  general  management  belongs  to  directors  as  a  board, 
and  action  of  the  board  must  take  place  at  board  meetings,  ex- 
cept in  those  states  which  give  statutory  authority  to  a  major- 
ity of  the  board  to  pass  on  matters  of  business  without  a  formal 
meeting.  When  stockholders  have  delegated  powers  to  the 
board,  the  board's  authority  is  supreme.  The  stockholders  can 
then  neither  force  the  directors  to  exercise  the  powers  delegated 
nor  restrain  them  from  exercising  the  powers  unless  the  neglect 
to  act  or  the  act  is  so  unjust  or  so  prejudicial  to  the  interests  and 
rights  of  the  stockholders  as  to  warrant  .an  appeal  to  the  courts. 
Powers  delegated  in  by-laws  may  be  repealed,  however.  Ordi- 
narily the  recourse  of  stockholders  who  are  dissatisfied  with  their 
directors  is  the  election  of  a  new  board. 

It  has  been  held  that  neither  a  corporation  nor  its  directors 
may  remove  a  member  of  the  board  except  according  to  the  pro- 
visions of  a  statute,  of  a  valid  by-law,  or  of  other  constating  in- 
strument. But  there  is  modern  authority  that  a  corporation  has, 
incident  to  its  existence,  the  implied  power  to  remove  a  director 
or  officer  for  cause,  independent  of  statutory  provision  or  pro- 
vision in  the  articles.  Where  there  is  no  such  authority  given  in 
the  statutes,  a  corporation  will  do  well  to  provide  in  the  articles 
or  by  by-law  for  the  removal  of  directors  and  officers  for  cause. 
Directors  can  be  removed  only  by  the  stockholders  of  a  corpora- 
tion, unless  there  is  specific  statutory  authority  given  to  the  di- 
rectors themselves  to  remove  one  of  their  body.  When  the  direc- 
tors are  given  the  authority,  it  usually  requires  a  two-thirds  vote. 
At  common  law,  the  grounds  of  amotion  (removal)  of  a  director 
have  been  said  to  be,  first,  such  as  have  no  immediate  relation 
to  his  office  but  are  in  themselves  of  so  infamous  a  nature  as  to 
render  the  offender  unfit  to  exercise  any  public  franchise — in 


94  MODERN   BUSINESS   CORPORATIONS. 

cases  of  this  kind,  forgery,  perjury,  and  the  like,  there  must 
have  been  an  indictment  and  conviction  in  court ;  second,  such 
as  are  only  against  his  oath,  and  the  duty  of  his  office  as  a  cor- 
porator, and  amount  to  breaches  of  the  tacit  condition  annexed 
to  his  franchise  or  office ;  third,  such  as  are  of  a  mixed  nature, 
as  being  an  offense  not  only  against  the  duty  of  his  office  but 
also  a  matter  indictable  at  common  law — in  respect  of  these 
offenses  the  corporation  has  'the  power  of  trial  as  well  as  the 
power  of  removal.*  Corporate  action  is  necessary  to  the  forcible 
removal  of  a  director  (he  may  voluntarily  resign  on  request), 
and  to  make  the  proceeding  legal,  the  purpose  of  trying  the  mem- 
ber of  the  board  should  be  stated  in  the  notice  of  the  regular  or 
special  meeting  at  which  the  trial  will  occur.  Further,  there 
should  be  "a  monition  or  citation  directed  to  the  offending  per- 
son to  appear  at  the  appointed  meeting  for  trial ;  a  charge  given 
to  which  he  is  required  to  make  answer;  a  competent  time  as- 
signed for  proofs  and  answers  -;  liberty  of  counsel  to  defend  him, 
and  to  except  to  proofs  and  witnesses;  and  a  solemn  sentence 
after  a  hearing  of  proofs  and  answers."  Unless  statute  or  the 
rules  of  the  organization  provide  otherwise,  witnesses  need  not 
be  examined  under  oath.  It  is  not  necessary  that  the  evidence 
be  only  such  as  would  be  admissible  in  a  judicial  trial;  it  is 
sufficient  if  it  be  of  such  character  as  would  be  used  by  men  in 
their  private  affairs,  so  that  nothing  occurs  which  violates  the 
principles  of  natural  justice.  The  trial  may  be  conducted  openly, 
or  behind  closed  doors.  Directors  or  officers  appointed  by  reso- 
lution and  holding  place  during  the  pleasure  of  the  appointing 
power,  are  removable  by  resolution.  (Thompson,  Cyc.  745,  et 
seq. )  Where  there  are  statutory  requirements  for  the  removal  of 
directors,  they  must  be  followed. 

The  power  of  the  board  of  directors  extends  to  the  transaction 
of  any  and  all  of  the  company's  ordinary  and  regular  business. 
"For  the  purpose  of  dealing  with  others,  it  is  the  corporation." 
Thus  it  may  borrow  money,  contract  debt,  mortgage  the  prop- 


*  Quoted  from  an  opinion  of  Lord  Mansfield,  with  comment  by 
Seymour  D.  Thompson. 


DIBECTOES   AND  OFFICEES.  95 

erty  of  the  corporation,  and  issue  bonds,  but  it  cannot  do  such 
radical  acts  as  to  increase  the  capital  stock,  lease  the  corpora- 
tion property,  or  wind  up  the  corporate  business  without  the 
consent  or  express  authorization  of  the  stockholders.  In  the 
transaction  of  ordinary  business  the  board  is  bound  by  the  pro- 
visions of  the  statutes,  articles,  and  by-laws,  and  in  case  of  non- 
observance  where  there  is  resulting  damage,  the  members  are 
personally  liable. 

At  common  law,  directors  are  personally  liable  for  ultra  vires 
acts. from  which  damage  comes;  and  for  fraud,  trespass,  or 
other  corporate  act  done  with  their  knowledge,  consent,  or  co- 
operation. As  directors  are  trustees  holding  the  property  of 
the  company,  they  are  "bound  to  properly  direct  and  supervise 
its  affairs.  The  duties  of  a  board  and  its  officers  are  correlative ; 
on  the  one  hand  the  duties  are  directive  and  supervisory,  and 
on  the  other  they  are  executive.  There  are  many  matters  that 
occupy  the  middle  ground,  where  it  is  difficult  to  fix  responsibil- 
ity. The  board  is  responsible  for  all  things  that  enter  into  its 
rights  and  duties,  but  it  is  not  expected  to  watch  the  routine  of 
every  day's  business,  or  observe  the  particular  state  of  business 
transactions  unless  there  is  special  reason;  nor  is  it  to  be  held 
for  sudden  and  unforeseen  derelictions  of  executive  officers,  nor 
for  other  accidents  which  there  was  no  reason  to  apprehend. 

The  board  of  directors  is  not  an  executive  body,  but  a  de- 
liberative, legislative,  appointive  and  supervisory  one.  It  au- 
thorizes and  instructs  the  officers  and  agents  of  the  corporation 
to  carry  out  the  measures  it  desires  carried  out.  As  was  said, 
the  authorization,  to  be  legally  complete,  must  be  made  at  a 
tona  fide  meeting  of  the  board,  and  not  alone  by  the  assent  of 
the  members  separately.  When  officers  carry  out  measures  not 
legally  authorized,  they  may  be  held  liable  for  any  resulting 
damage  or  loss  to  the  corporation,  if  the  board,  at  a  subsequent 
proper  meeting,  does  not  authorize  or  ratify  the  acts  and  re- 
fuses to  accept  the  benefits  of  them.  Any  act  which  the  board 
could  have  authorized,  and  which  has  already  been  done,  it  can 
make  binding  on  the  corporation  by  ratification  at  a  meeting 
subsequent  to  the  time  of  the  act ;  also,  if  it  accepts  the  benefit 


96  MODERN   BUSINESS   CORPORATIONS. 

of  such  act  with  knowledge  of  the  facts,  a  ratification  by  acquies- 
cence will  be  implied  without  formal  retroactive  authorization. 

Frequently  the  directors  for  the  first  year  are  named  in  the 
articles  of  association.  If  they  are  not  so  named  by  agreement 
of  the  incorporates,  they  are  elected  by  the  stockholders.  The 
stockholders  may  also  elect  the  officers,,  but  they  usually  delegate 
that  right  to  the  directors.  As  the  direct  general  management 
of  the  corporation  is  in  the  hands  of  the  directors,  it  is  right  that 
the  directors  should  choose  the  executive  and  other  officers  who 
manage  the  details,  that  the  officers  may  be  responsible  to  the 
directors  and  removable  by  them.  "The  ministerial  agents  [of- 
ficers, not  directors]  of  a  corporation,  not  holding  for  fixed 
terms,  defined  and  limited  by  statute  or  by-laws,  may  be  re- 
moved by  the  body  that  chose  them,  subject  only  to  a  right  of 
action  against  the  corporation  if  such  removal  resulted  in  a 
breach  of  their  contract  of  employment."  (Thompson,  10  Cyc., 
p.  935.)  They  are  dischargeable  as  any  other  employe,  without 
assignment  of  cause,  without  notice,  and  without  trial,  at  the 
pleasure  of  the  directors.  If  there  be  a  fixed  term  of  office,  re- 
moval must  be  for  cause.  (Thompson,  Corp.,  §§  804,  805,  820. 
See  also  Clark  and  Marshall,  Priv.  Corp.,  §  666.)  The  same 
formal  procedure  should  be  followed  in  removing  an  officer  for 
cause  (incompetency,  violation  of  employment  contract,  etc.), 
as  in  removing  directors.  Corporations  rarely  have  trouble  in 
dispensing  with  officers,  as  a  determination  to  remove  shown  on 
the  part  of  the  directors  will  usually  bring  a  resignation,  which 
will  relieve  the  board  from  the  necessity  of  formal  action.  In 
cases  of  emergency,  an  officer  may  be  restricted  or  almost  shorn 
of  dangerous  power  by  the  passing  of  by-laws  or  resolutions. 
The  relations  of  directors  to  their  corporation  and  of  officers  to 
their  corporation  are  given  to  be  different  in  this,  that  the  direc- 
tors are  considered  to  have  a  franchise  in  their  office,  since  they 
usually  receive  no  compensation,  or  only  a  nominal  compensa- 
tion, for  services,  while  the  paid  officers  sustain  more  the  relation 
of  employe  to  employer. 

In  general,  the  powers  of  the  officers  of  a  corporation  are  de- 
rived from  the  power  which  elects  or  appoints  the  officers,  and 


DIRECTORS   AND  OFFICERS.  97 

depend  upon  the  terms  of  their  agency.  The  powers  may  be 
conferred  by  the  articles,  by-laws,  or  resolution,  or  implied  from 
the  character  of  the  office  itself.  An  office,  in  itself,  confers  no 
power  to  control  corporate  property  or  to  bind  the  corporation 
by  contract,  or  otherwise.  The  duties  and  powers  ordinarily 
given  to  the  several  officers  of  a  corporation,  and  performed  and 
exercised  by  them,  are  generally  understood,  and  acts  done  and 
contracts  made  in  pursuance  thereof  are  binding  on  the  corpora- 
tion. When  an  officer  is  about  to  take  an  unusual  step,  one 
which  he  is  in  doubt  as  to  his  authority  to  take,  and  which  may 
involve  liability  on  his  part  if  he  does  not  have  the  authority, 
he  should  seek  consent  and  authority  from  the  board  of  di- 
rectors so  as  to  be  relieved  of  personal  responsibility.  Cor- 
poration officers  should  be  familiar  with  statutory  liabilities  im- 
posed on  them  by  the  parent  state  and  the  state  in  which  the 
principal  business  is  conducted. 

A  corporation  will  always  have  a  president,  secretary  and 
treasurer,  and  there  may  be,  and  usually  are  in  large  corpora- 
tions, one  vice-president  or  several  vice-presidents,  assistant  sec- 
retaries and  treasurers,  a  managing  director  or  general  man- 
ager, and  an  auditor  and  a  counsel.  Directors,  as  directors, 
are  not  ministerial  officers,  as  has  been  shown.  Those  who  fill 
positions  minor  to  officers  and  directors  are  classed  as  agents 
and  employes.  In  small  companies  it  frequently  happens  that 
the  same  persons  are  stockholders,  directors,  and  officers,  and 
they  manage  the  business.  The  one  in  whom  is  reposed  the  man- 
agement of  a  business  and  the  counsel  are  not  always  officers,  but 
they  are  if  the  by-laws  make  them  so  or  if  the  duties  assigned 
to  them  might  give  that  interpretation.  Two  offices  may  be  held 
by  the  same  person  where  it  is  desirable.  The  president  and 
vice-president  should  be  chosen  from  the  members  of  the  board 
of  directors,  as  they  are  the  presiding  officers  of  the  board  as  well 
as  of  the  stockholders.  It  frequently  is  advantageous  to  select 
some  of  the  other  officers  from  the  board,  particularly  the  secre- 
tary, but  it  is  not  necessary.  Statutes  sometimes  regulate  these 
matters,  and  should  be  referred  to.  When  officers  are  elected, 
MOD.  Bus.  CORP.— 7 


98  MODERN   BUSINESS    CORPORATIONS. 

they  may  take  office  and  take  charge  of  the  meeting  in  which 
they  are  elected,  or  they  may  be  installed  in  office  at  the  close 
of  the  meeting  and  assume  their  official  functions  from  that  time. 

A  corporation  should  take  care  that  no  one  acts  for  it  in  the 
capacity  of  officer,  director,  or  agent  who  is  not  duly  authorized. 
If  it  permits  such  person  to  openly  act  for  it,  the  person  is  a  de 
facto  officer,  director,  or  agent,  whether  or  not  he  was  regularly 
elected  or  appointed,  and  the  corporation  is  bound  by  his  acts. 

When  officers  and  directors  are  to  receive  a  pecuniary  compen- 
sation for  services,  it  should  be  so  provided  in  the  by-laws,  as 
they  are  not  ordinarily  entitled  in  law  to  compensation  for  the 
regular  duties  incident  to  their  positions. 

§  47.    Directors'  Meetings. 

Directors'  meetings  are  regular  and  special.  The  frequency  of 
the  regular  meetings  depends  upon  the  necessity  for  close  super- 
vision of  the  corporation's  affairs.  In  some  business  corpora- 
tions the  directors  meet  once  a  month ;  in  others  they  meet  once 
in  three  months,  once  in  six  months,  or  even  only  once  a  year. 
Usually  directors  must  meet  in  the  state  under  whose  laws  the 
corporation  was  organized,  but  some  states  provide  by  statute 
that  the  directors  may  meet  outside  the  state  if  the  articles  or 
by-laws  so  provide.  Provision  for  notice  of  meetings  should  be 
made  in  the  by-laws,  and  a  given  number  of  days  specified  as 
the  period  that  shall  elapse  between  the  time  the  notices  are  sent 
and  the  time  of  the  meeting.  The  time  and  place  of  the  meet- 
ing are,  of  course,  necessary  inclusions.  Every  director  is  en- 
titled to  a  proper  notice  of  meetings,  and  if  the  notice  of  a  meet- 
ing as  provided  by  by-law  is  neglected,  a  director  can  render  void 
all  action  taken  at  that  meeting.  The  secretary  sends  the  no- 
tices of  meetings,  and  should  present  to  the  meetings  and  record 
in  their  minutes  the  proof  that  proper  notices  were  given.  If  all 
the  directors  are  present  the  necessity  for  previous  notice  may  be 
avoided  by  having  all  the  directors  sign  an  acknowledgment  of 
notice  and  waiver  of  service  of  notice,  which  must  be  recorded  in 
the  minutes,  In  nearly  all  cases,  the  president  of  the  corporation 


DIRECTORS    AND   OFFICERS.  99 

is  the  presiding  officer  of  the  board ;  but,  unless  the  statutes  or  ar- 
ticles provide  to  the  contrary,  the  board  may  elect  any  one  of  its 
members  chairman.  Likewise  the  secretary  of  the  corporation  is 
usually  the  most  convenient  person  to  be  secretary  of  the  board. 
The  order  of  business  at  the  principal  annual  meeting,  which  is 
the  first  meeting  after  the  election  of  directors,  may  be  as  fol- 
lows: (1)  Calling  the  roll;  (2)  reading  and  approving  minutes 
not  previously  disposed  of;  (3)  reports  of  officers  and  commit- 
tees; (4)  election  of  officers;  (5)  unfinished  business;  (6)  new 
business;  (7)  adjournment.  A  majority  of  all  the  board  (the 
number  provided  in  the  by-laws)  usually  constitutes  a  quorum 
for  the  transaction  of  business.  Chancellor  Kent  says :  "There  is 
a  distinction  between  a  corporate  act  to  be  done  by  a  select  and 
definite  body,  as  by  a  board  of  directors,  and  one  to  be  performed 
by  the  constituent  members.  In  the  latter  case,  a  majority  of 
those  who  appear  may  act,  but  in  the  former  a  majority  of  the 
definite  body  must  be  present,  and  then  a  majority  of  the  quorum 
may  decide.  This  is  the  general  rule  on  the  subject."  Statutes 
may  be  so  constructed  as  to  modify  the  rule.  All  directors  pres- 
ent at  a  meeting  may  vote  on  any  matters  submitted;  but  a  di- 
rector cannot,  as  a  stockholder  may,  delegate  to  an  agent  by 
proxy  authority  to  represent  him  at  a  directors'  meeting. 

There  should  be  provision  in  the  by-laws  for  the  calling  of 
special  meetings  of  the  directors,  either  by  the  president  or  by  a 
given  number  of  the  directors,  or  by  both.  Notice  should  be 
sent  by  the  secretary  giving  the  time,  place,  and  purposes  of  the 
meeting.  All  the  purposes  of  the  meeting  should  be  given,  else 
action  on  other  matters  than  those  specified  may  be  rendered  in- 
valid if  a  director  interested  in  those  matters  failed  to  attend 
because  he  had  no  information  that  they  would  come  up  for 
consideration.  If  all  the  directors  are  present,  they  may  act 
on  any  matter,  whether  it  was  mentioned  in  the  notice  or  not, 
and,  also,  any  director  may  waive  the  right  to  proper  notice. 
It  is  customary  to  include  waivers  with  the  notices  when  an 
emergency  exists  and  a  meeting  is  necessary  at  such  a  time  that 
would  make  it  impossible  to  issue  notices  the  given  length  of 
time  before  the  meeting  as  specified  in  the  by-laws.  Frequently 


103  MODERN    BUSINESS    CORPORATIONS. 

it  is  better  not  to  specify  such  a  time  for  notice  of  special  di- 
rectors' meetings,  especially  where  the  board  is  small  and  where 
it  can  be  easily  and  quickly  called  together. 

§  48.    The  President. 

The  president  of  a  corporation  is  the  presiding  officer  at  meet- 
ings of  the  stockholders  and  directors,  and  is  frequently  the 
chief  of  the  executive  agents  of  the  corporation,  i.  e.,  in  the 
smaller  corporations  he  is  often  the  active  general  manager  of 
the  regular  business  with  delegated  power  to  employ  and  dis- 
charge assistants.  In  such  cases  he  has  the  power  of  a  general 
agent  in  the  customary  transactions  of  the  business  of  the  cor- 
poration. In  large  corporations  where  there  are  vice-presidents, 
a  chairman  of  the  board  of  directors,  and  a  chairman  of  a  finance 
committee,  the  resulting  differentiation  of  powers  and  duties 
modifies  the  president's  work  and  leaves  him  to  perform  what- 
ever special  duties  are  assigned  to  him  by  articles  or  by-laws  or 
are  in  the  line  of  his  duty  as  he  has  been  accustomed  to  perform 
it.  The  chairman  of  the  board  will,  of  course,  relieve  the  presi- 
dent of  the  duty  of  presiding  over  the  deliberations  of  the  board, 
and  the  chairman  of  the  finance  committee  will  likely  perform 
some  of  the  functions  relating  to  financial  matters  that  the  presi- 
dent would  otherwise  attend  to.  Some  of  the  presidential  duties 
may  be  distributed  among  the  vice-presidents.  It  should  be  re- 
membered that  the  distribution  of  duties  is,  to  a  large  extent, 
prudential,  or  dependent  on  circumstances  perhaps  outside  of 
business — as,  for  instance,  where  a  president  can  give  only 
a  small  part  of  his  time  to  a  corporation's  business  and  much 
of  his  work  is  performed  by  some  other  officer.  When  a  presi- 
dent is  entrusted  with  certain  duties  and  receives  a  salary,  he  is 
bound  to  exercise  proper  care  that  the  duties  are  performed, 
else,  in  case  of  neglect  and  of  loss  to  the  corporation,  he  may  be 
held  liable.  In  his  fiduciary  relation  he  is  bound  to  employ  the 
powers  delegated  to  him  for  the  benefit  of  the  corporation  and 
must  not  use  them  for  his  own  personal  gain  and  advantage. 

Besides  the  duties  of  presiding  over  meetings  of  stockholders 


DIRECTORS   AND   OFFICERS.  101 

and  directors  and  signing  certificates  of  stock  and  minutes  of 
meetings  over  which  he  presided,  some  of  the  duties  commonly 
performed  by  a  president  are  the  signing  or  countersigning  of 
notes,  checks,  bills,  contracts,  and  other  instruments  executed 
in  the  carrying  on  of  the  customary  business  of  the  corporation, 
and  all  special  contracts,  liens,  deeds,  and  other  special  instru- 
ments which  are  ordered  executed  by  the  directors.  All  such 
contracts  and  other  instruments  made  on  behalf  of  the  corpora- 
tion by  the  president  will  bind  the  corporation.  In  the  absence 
of  the  treasurer,  the  president  usually  may  indorse  drafts, 
checks,  and  other  negotiable  instruments,  either  for  deposit  or 
collection.  When  he  is  acting  in  a  managerial  capacity,  he  makes 
an  annual  report  of  the  affairs  and  condition  of  the  corporation, 
and  calls  the  attention  of  the  stockholders  or  board  to  any  mat- 
ters demanding  their  notice.  He  may  also  make  or  sign  the 
necessary  reports  to  state  officials.  The  compensation  of  the 
president  depends  upon  the  amount  of  time  he  gives  to  the  busi- 
ness of  the  corporation,  and  the  real  value  or  market  value  of  his 
services,  the  responsibilities  he  is  assuming,  his  influence  and 
other  incidental  matters  too  numerous  to  mention.  If  he  is  not 
active,  he  may  draw  no  salary  at  all.  The  president  should 
have  executive  capacity  when  he  has  managerial  work,  and  should 
always  be  a  man  having  a  reputation  for  cleanness  and  enter- 
prise in  industrial  or  commercial  life. 

§  49.    The  Vice-President. 

The  vice-president  is  supposed  to  keep  in  touch  with  the  af- 
fairs of  the  corporation,  and  in  the  absence  of  the  president,  to 
act  in  his  place.  The  same  powers  and  principles  that  govern 
the  conduct  of  the  president  apply  to  the  vice-president  acting 
in  his  stead.  In  many  small  corporations,  the  office  of  vice- 
president  is  an  inactive  one,  the  incumbent  having  nothing  to  do 
but  serve  on  the  board  of  directors,  if  he  is  a  member  of  that 
body.  In  the  larger  corporations,  the  vice-president  may  be  an 
active  official,  having  the  superintendence  of  some  particular 
part  of  the  corporation's  business ;  or  there  may  be  first,  second, 


102  MODERN   BUSINESS    CORPORATIONS. 

third,  etc.,  vice-presidents,  each  having  specific  duties  connected 
with  the  regular  business.  Such  vice-presidents  may  receive 
such  compensation  as  their  services  merit;  an  inactive  vice- 
president  will  usually  receive  no  compensation.  The  office  is 
frequently  merely  an  honorary  one,  offered  to  some  prospective 
stockholder  to  secure  his  more  active  influence,  or  it  is  given 
to  some  person  of  influence  whose  name  counts  for  much  in  the 
community  or  line  of  business  in  which  the  corporation  is  en- 
gaged. 

§50.    The  Secretary. 

The  common  duty  of  a  secretary  is  the  conduct  of  the  routine 
business  of  a  corporation.  He  is  the  custodian  of  the  corporate 
seal,  and  of  the  corporation  books ;  he  keeps  and  reads  the  min- 
utes of  the  meetings  of  stockholders  and  directors;  issues  calls 
for  meetings;  notifies  officers  and  directors  of  their  election; 
issues,  seals,  transfers  and  cancels  certificates  of  stock,  and 
sometimes  signs  them  with  the  president  (when  it  is  not  pro- 
vided that  the  treasurer  shall  sign)  ;  closes  the  transfer  book  at 
proper  time;  affixes  the  seal  to  formal  instruments,  and  attests 
with  his  signature;  prepares  the  reports  which  are  required  to 
be  made  to  state  officials;  prepares  statistics  for  reports  to  be 
made  by  the  president  to  the  stockholders  and  directors ;  attends 
to  the  correspondence  of  the  corporation  or  has  supervision  over 
it;  and  performs  all  duties  imposed  by  the  directors,  or  which 
custom  in  transacting  the  corporation  business  has  made  part  of 
his  duty.  All  contracts  made  within  the  range  of  his  customary 
work  will  be  binding  on  the  corporation.  The  secretary  should 
be  a  man  of  perspicacity,  energy  and  honesty,  and  should  have 
a  general  knowledge  of  elementary  corporation  law  and  be  fa- 
miliar with  cotporate  practices,  should  know  something  of  com- 
mercial law  and  practices,  should  be  familiar  with  the  general 
principles  of  corporate  finance  and  accounting,  should  under- 
stand parliamentary  law,  and  be  familiar  with  the  corporation 
statutes  of  the  state  under  whose  laws  the  corporation  was  or- 
ganized and  of  that  in  which  the  principal  business  is  located. 


DIRECTORS  AND  OFFICERS.  103 

The  secretary  of  a  corporation  is  usually  an  information  bureau 
for  the  other  officers  and  directors. 


§  51.    The  Treasurer. 

The  general  financial  agent  of  a  corporation  is  the  treasurer. 
He  is  the  routine  financial  manager  of  the  corporation,  and  has 
charge  of  money,  notes,  and  any  fund  securities  belonging  to  it, 
as  well  as  of  its  books  of  account.  He  sees  to  all  expenditures 
and  requires  receipts  and  vouchers  therefor,  and  issues  receipts 
for  moneys  paid  to  the  corporation.  If  he  does  not  perform  this 
work  himself,  as  he  seldom  does  in  large  corporations,  he  super- 
intends the  clerical  force  that  does  the  actual  work.  Hence,  he 
should  be  familiar  with  the  principles  of  corporate  finance,  and 
should  have  an  accurate  and  comprehensive  knowledge  of  book- 
keeping and  accounting.  In  many  of  the  small  corporations,  the 
treasurer  is  the  bookkeeper.  Usage  often  determines  the  power 
of  a  treasurer  to  sign  notes  or  to  contract  on  behalf  of  the  cor- 
poration. But  it  is  a  matter  of  prudence  to  define  his  powers 
and  duties  somewhat  explicitly  in  the  by-laws.  The  treasurer 
commonly  signs  certificates  of  stock ;  indorses  for  deposit  or  col- 
lection checks,  notes,  bills,  and  other  negotiable  instruments; 
signs,  with  or  without  the  president,  as  the  by-laws  provide, 
the  checks  of  the  corporation  (he  should  sign  with  the  corpora- 
tion name,  "per  James  Sully,  treasurer")  ;  joins  with  the  presi- 
dent in  the  execution  of  all  instruments  that  have  to  do  with 
the  corporation's  financial  proceedings;  makes  reports  of  the 
corporation's  financial  condition  to  the  annual  meetings  of 
stockholders,  and  so  keeps  in  touch  with  the  financial  affairs 
that  he  is  ready  at  a  moment's  notice  to  state  to  the  directors  the 
assets,  liabilities,  or  details  of  any  financial  transactions  of  the 
corporation.  If  there  is  a  finance  committee,  some  of  this  work 
may  have  been  assigned  to  it  to  the  relief  of  the  treasurer.  A 
treasurer  should  always  deposit  a  corporation's  funds  in  the  name 
of  the  corporation.  Where  a  treasurer's  position  is  a  responsible 
one,  on  account  of  large  transactions  and  the  handling  of 
much  money,  he  is  usually  requested  to  give  bond.  It  is  better 


104  MODERN   BUSINESS    CORPORATIONS. 

that  such  bond  be  secured  from  a  reliable  and  responsible  fidelity 
insurance  company.  Such  company  will  keep  closer  watch  over 
the  treasurer's  performances,  and  will  take  more  pains  to  detect 
anything  irregular  in  them,  than  a  personal  surety,  and  it  will 
also  be  more  fearless  and  energetic  in  prosecuting  actions  against 
a  defaulting  treasurer.  The  compensation  of  a  treasurer  will 
vary  from  that  of  an  ordinary  bookkeeper  to  that  of  an  expert 
financial  manager. 

§•  52.    The  Managing  Director  and  the  General  Manager. 

Sometimes  a  board  of  directors  of  large  corporations  will  ap- 
point one  of  their  number  a  managing  director,  whose  duties  will 
supplement  those  of  the  president.  When  a  president  who  serves 
in  a  managerial  capacity  is  often  absent  from  the  business,  a 
managing  director  is  a  convenience,  as  he  can  take  the  presi- 
dent's place  and  perform  those  ordinary  duties  pertaining  to  the 
regular  conduct  of  the  business  that  the  president  would  per- 
form. His  duties  should  be  defined  in  a  by-law,  or  in  the  reso- 
lution by  which  he  is  appointed,  when  his  office  is  temporary. 
Sometimes  there  is  a  managing  director  where  there  is  also 
an  active  president,  and  in  such  cases  his  duties  should  be  speci- 
fied carefully,  so  that  he  will  not  come  into  conflict  with  the 
president. 

The  general  manager  of  a  corporation  attends  to  the  super- 
vision of  all  the  active  commercial  or  industrial  business,  such 
as  the  manufacturing  and  selling  of  goods,  etc.,  in  distinction 
from  the  corporate  business.  His  duties  may  be  assigned  him 
by  the  directors  or  the  president,  and  he  reports  to  one  or  the 
other.  When  he  is  a  director,  his  office  is  not  much  different 
from  that  of  a  managing  director.  Otherwise  the  position  is  not 
so  high  as  that  of  managing  director,  as  it  is  more  that  of  an 
employe,  depending  upon  the  contract  of  employment. 

§  53.     The  Counsel. 

Large  corporations  retain  a  salaried  lawyer,  who  works  under 
the  direction  of  the  directors  or  the  president.  The  advantage- 


DIRECTORS   AND   OFFICERS.  105 

of  a  regularly  employed  attorney  to  counsel  with  the  officers  and 
directors,  to  prepare  contracts  and  agreements,  and  to  inspect 
contracts  and  agreements  sent  for  acceptance,  is  apparent 
enough.  Much  unnecessary  litigation  may  thus  be  avoided.  The 
counsel  is  usually  paid  a  retainer  of  from  one  hundred  dollars 
up,  according  to  the  advice  necessary  to  be  given  and  work  to 
be  done,  and  is  paid  extra  for  all  litigation  in  which  he  takes 
part  during  the  year.  (See  Miscellaneous,  The  Corporation  Law- 
yer.) 

§  54.     The  Auditor. 

Many  of  the  largest  corporations  employ  an  auditor  who 
superintends  the  bookkeeping,  the  financial  system  and  reports, 
and  all  matters  of  corporate  and  business  statistics  that  usually 
come  within  an  auditor's  or  accountant's  purview.  He  should 
not  be  a  partisan  of  any  stockholder  or  group  of  stockholders, 
and  should  be  the  most  independent  employe  of  the  corpora- 
tion. If  a  regular  auditor  is  not  employed,  a  corporation  may 
employ  an  expert  often  enough  to  certify  the  books  and  accounts. 
(See  Part  VII.) 

An  auditing  committee,  composed  of  stockholders  or\  direc- 
tors, unless  there  are  members  who  are  familiar  with  bookkeep- 
ing and  accounting  practices,  is  inefficient  for  the  needs  of  large 
corporations.  Moreover,  their  work  is  usually  done  very  super- 
ficially, and  also  they  may  be  interested  in  making  a  form  of  re- 
port which  will  not  disclose  all  the  facts  that  should  be  shown. 
More  general  use  should  be  made  of  the  permanently  employed 
or  the  occasional  professional  auditor. 

§  55.    Committees. 

As  has  been  noted,  a  board  of  directors  does  not  generally 
have  the  power  to  delegate  the  right  to  exercise  discretion  which 
is  vested  in  it.  Therefore,  the  duties  of  such  standing  commit- 
tees as  executive  and  finance  committees,  which  are  composed  of 
members  of  the  board  and  may  have  supervision  respectively  of 
the  general  business  and  financial  affairs  of  the  corporation, 


106  MODERN   BUSINESS    CORPORATIONS. 

should  be  clearly  defined  in  the  articles  or  by-laws.  The  more 
specific  provision  for  the  duties,  and  the  less  discretion  in  their 
performance,  the  better,  since  the  law  on  this  subject  has  not 
been  adjudicated  to  any  great  extent.  It  is  not  an  uncommon 
practice,  however,  among  the  directors  of  business  corporations 
to  delegate  part  of  their  discretionary  authority  to  committees. 
In  New  Jersey  it  has  sometimes  been  provided  by  charter  that 
an  executive  committee  may  exercise  all  the  powers  of  the  board 
whenever  a  quorum  of  the  board  is  not  present  at  a  board  meet- 
ing, as  well  as  at  times  when  the  board  is  not  in  session. 


PART  V. 

CAPITAL  STOCK  AND  BONDS. 


107 


CAPITAL  STOCK  AND  BONDS. 

§  56.  The  Nature  of  Capital  Stock. 

57.  Full  Paid  and  Partly  Paid  Stock. 

58.  Bonus  and  Watered  Stock. 

59.  Usual  Kinds  of  Stock. 

60.  Registrars  and  Transfer  Agents. 

61.  Incidents  of  Issue  and  Transfer  of  Stock. 

62.  Bonds. 

§  56.    THE  NATURE  OF  CAPITAL  STOCK. 

As  there  is  no  consensus  of  legal  opinion  on  the  exact  defini- 
tion of  capital  stock,  and  as  the  term  is  frequently  used  inter- 
changeably with  capital,  capitalization,  etc.,  the  definition  framed 
here  is  made  to  accord  with  what  seems  to  be  the  general  tend- 
ency of  the  courts  and  what  strict  accuracy  from  a  knowledge  of 
corporate  practice  would  dictate.  Capital  stock  and  capital  are 
distinguishable.  The  capital  of  a  corporation  is,  on  the  initia- 
tion of  a  corporate  enterprise,  the  total  of  the  amounts  of  money 
paid  or  property  given  in  by  subscribers  to  shares  of  stock,  or 
agreed  and  secured  to  be  paid  or  given  in  by  them ;  when  the  cor- 
poration has  been  running  some  time,  it  is  these  amounts  of 
money  or  property  in  themselves,  or  the  money  represented  by 
property  purchased,  together  with  all  the  undivided  profits  or 
gains  realized  in  conducting  the  business,  and  used  in  conduct- 
ing the  business,  less  all  the  losses  and  depreciations  incurred  in 
operation.  Money  derived  from  the  sale  of  bonds  is  sometimes 
included  in  the  capital.  In  financial  practice,  capital  belongs 
to  the  corporation  considered  as  a  legal  person  or  entity,  and  not 
to  the  stockholders,  or  shareowners.  It  may  change  from  time 
to  time ;  it  is  the  net  corporate  property  at  any  given  time. 

Capital  stock  is,  in  the  statutes  providing  for  the  organization 
of  private  corporations,  the  amount  authorized  by  the  charter 

109 


110  MODERN   BUSINESS    CORPORATIONS. 

as  the  limit -up  to  which  the  capital  of  the  corporation  may  be 
extended  by  stock  subscriptions.  This  amount  is  fixed.  More 
strictly,  as  a  matter  of  equity,  capital  stock  is  the  right  to  that 
part  of  the  mentioned  amount  which  is  made  vital  and  active 
by  being  subscribed  and  paid  to  the  capital  account.  Under 
the  first  definition  the  capital  stock  has  merely  a  potential  value, 
while  under  the  second  definition  its  value  is  actual.  Capital 
shares  are  the  personal  property  of  the  several  stockholders. 
They  are  in  the  nature  of  what  is  known  to  law  as  a  "chose  in 
action,"  a  personal  right  to  a  thing  of  which  one  does  not  have 
possession,  which  right,  under  certain  contingencies,  may  be  en- 
forced by  law.  The  corporation  owns  the  capital  in  a  sense,  but 
holds  it  for  the  benefit  of  the  shareholders.  Capital  stock  that  is 
paid  for,  paid-up  stock,  is  a  liability  of  the  corporation  to  the 
shareholders.  The  value  of  the  capital  stock  depends  upon  the 
value  of  the  net  corporate  property,  capital,  and  this  value  may 
be  more  or  less  than  the  face,  or  par,  value  of  all  the  shares. 
Profits  and  gains  are  part  of  the  capital  till  they  are  distributed, 
as  in  dividends,  for  instance,  among  the  shareholders.  Dividend 
rights  belong  to  capital  stock,  and,  in  this  enlarged  view,  capital 
stock  is  the  total  amount  of  the  issued  rights  to  share  equitably  in 
the  net  capital,  or  assets,  of  the  corporation,  and  also  in  the  net 
earnings  as  they  accrue  and  are  distributed.  Capital  stock  is  not 
tangible  property,  but  it  is  usually  represented  tangibly  by  the 
certificates  of  shares.  The  right  to  the  shares  of  property  is  never 
realized  except  on  the  dissolution  of  the  corporation  and  on  the 
distribution  of  its  assets,  but  it  may  be  practically  realized  by 
selling  the  right  to  another  for  the  value  of  the  share  or  shares 
which  it  represents.  The  sale  is  made  by  formally  transferring 
the  certificate  of  stock  to  the  purchaser.  Shares  of  capital  stock 
are  generally  subject  to  levy  and  execution  as  is  other  personal 
property. 

A  corporation  for  profit  must  have  capital  stock,  and  a  cor- 
poration not  for  profit  may  or  may  not  have  capital  stock.  But 
a  business  corporation  for  profit  or  a  capitalized  corporation  not 
for  profit  may  exist  without  share  ownership  in  the  absence  of 
any  statutory  or  charter  provision  to  the  contrary,  as  in  a  case 


CAPITAL   STOCK   AND   BONDS.  Ill 

where  the  rights  of  the  members  in  the  capital  stock  pass  with 
their  rights  as  members,  as  sometimes  happens  in  lodge  organiza- 
tions. 

§  57.    FULL  PAID  AND  PARTLY  PAID  STOCK. 

Stock  is  full  paid  if  it  has  been  paid  for  at  par  in  cash  or  in 
full  equivalent  to  par  value  in  property  or  services,  where  this 
latter  form  of  payment  is  permissible.  If  full  par  value  has  not 
been  given  for  the  stock  it  is  only  partly  paid.  Stock  issued  "full 
paid  and  non-assessable"  in  good  faith  and  without  fraud  is  in 
no  way  obligated  to  the  corporation  or  its  creditors,  except  in 
some  states  for  labor,  nor  to  the  corporation  for  assessments  im- 
posed, except  in  such  states  as  Minnesota  and  California,  where 
a  liability  is  imposed  on  all  private  business  corporation  stock  as 
on  bank  stock,  making  the  holders  thereof  liable  in  excess  of 
the  par  value  of  the  shares.  If  there  are  not  restrictive  statutes, 
stock  may  be  issued  at  such  a  price  as  the  corporation  directors, 
on  authority  of  the  stockholders,  desire.  Stock  is  frequently 
issued  in  exchange  for  only  a  part  of  its  par  value  and,  in  the 
absence  of  a  statute  constituting  such  stock  "full  paid  and  non- 
assessable" when  so  issued,  the  holders  thereof  are  liable  to 
creditors  of  the  corporation  in  the  difference  between  the  amount 
paid  and  the  par  value  thereof,  but  they  are  not  liable  to  the 
corporation  itself.  This  applies  to  original  purchasers  and  sub- 
sequent purchasers  who  know  of  the  fact  that  the  stock  is  only 
partly  paid,  but  does  not  apply  to  subsequent  purchasers  for 
value  who  are  innocent  of  the  fact  that  the  stock  is  only  partly 
paid.  These  last  are  not  liable  to  creditors  nor  to  the  corpora- 
tion. When  stock  is  issued  full  paid  and  non-assessable,  the  cer- 
tificate should  so  recite. 

§  58.    BONUS  AND  WATERED  STOCK. 

Where  there  is  no  constitutional  or  statutory  prohibition  a 
corporation  may  give  away  common  stock  with  bonds  or  pre- 
ferred stock  as  a  "bonus" ;  or  it  may  issue  stock  under  an  agree- 
ment whereby  the  holder  is  to  pay  less  than  the  par  value.  Such 


112  MODERN   BUSINESS   CORPORATIONS. 

stock  cannot  be  held  liable  to  the  full  par  value  as  between 
the  holder  and  the  corporation  or  as  between  the  holder  and 
stockholders  who  acquiesce  in  the  issue.  The  transaction  is 
binding  on  the  corporation  and  on  acquiescent  stockholders. 
But  if  the  stock  is  an  original  issue  on  the  formation  of  the  cor- 
poration, the  transaction  is  a  fraud  against  creditors  who  have 
given  credit  on  faith  that  the  stock  is  full  paid.  If  the  corpora- 
tion becomes  insolvent,  the  stock  issued  as  a  bonus  or  only  partly 
paid  will  then  be  held  liable  to  the  full  amount  of  the  par  value. 
This  is  the  general  and  best  opinion,  though  in  New  York  it 
has  been  held  (Christensen  v.  Eno,  106  N.  Y.  97,  12  K  E.  648) 
that  the  liability  of  a  shareholder  depends  upon  his  contract 
with  the  corporation,  either  express  or  implied,  or  upon  a  statute 
fixing  the  liability,  and,  in  the  absence  of  contract  or  statute, 
one  who  accepts  shares  as  a  gift  does  not  commit  a  wrong 
against  the  creditors  nor  make  himself  liable  to  pay  par  for  the 
shares  in  case  of  corporate  insolvency  and  debt.  But  it  is  gener- 
ally true  that  those  who  became  creditors  before  bonus  or  partly 
paid  stock  was  issued,  and  those  who  become  creditors  with 
knowledge  of  the  facts  cannot  recover  against  such  stock. 

In  the  absence  of  statutory  permission,  the  only  case  in  which 
it  can  be  generally  regarded  as  safe  to  issue  bonus  or  partly 
paid  stock  without  liability  for  the  full  par  value  is  when  such 
stock  is  issued  at  its  marketable  value  by  an  active  corporation 
in  order  to  pay  its  debts  and  save  itself  from  insolvency.  In 
some  states  the  peculiar  wording  of  the  statutes  will  make  this 
unsafe.  In  the  case  of  Handley  v.  Stutz  (139  U.  S.  417 ;  Wilgus's 
Cases),  an  active  corporation  issued  bonds,  and  to  make  them 
marketable,  gave  as  a  bonus  an  amount  of  stock  equal  to  the  face 
value  of  the  bonds.  The  price  fairly  represented  the  market 
value  of  the  stock  and  bonds.  The  court  said :  "To  say  that  a 
corporation  may  not,  under  the  circumstances  indicated,  put  its 
stock  upon  the  market  and  sell  it  to  the  highest  bidder,  is  prac- 
tically to  declare  that  a  corporation  can  never  increase  its  capital 
by  a  sale  of  shares,  if  the  original  stock  has  fallen  below  par. 
*  *  *  No  one  would  take  stock  so  issued  at  a  greater  price 
than  the  original  stock  could  be  purchased  for,  and  hence  the 


CAPITAL   STOCK   AND   BONDS. 

ability  to  negotiate  the  stock  and  to  raise  the  money  must  de- 
pend upon  the  fact  whether  the  purchaser  shall  or  shall  not  be 
called  upon  to  respond  for  its  par  value/'  The  opinion  of  the 
dissenting  judges  is  in  line  with  certain  decisions  which  are 
against  the  view  that  the  holders  of  such  stock  will  not  be  liable 
to  creditors,  on  the  theory  that  the  stock  is  not  fully  paid. 

§  59.    USUAL  KINDS   OF  STOCK. 

The  power  of  incorporators  to  issue  share  rights  in  capital 
and  the  privilege  of  being  exempt  from  liability  as  partners  are 
in  the  nature  of  a  franchise  granted  by  the  state.  In  the  ab- 
sence of  a  provision  to  the  contrary,  or  because  of  a  special  pro- 
vision for  classes  of  stock,  the  members  of  a  corporation  may 
issue  more  than  one  kind  of  stock,  preferring  one  or  more  classes 
as  to  dividends,  and  as  to  the  distribution  of  capital  on  dissolu- 
tion. Where  stock  is  not  classified,  all  the  stock  is  common. 

Common  stock  is  that  which  commands  dividends  and  shares 
in  the  distribution  of  assets  on  the  dissolution  of  the  corporation, 
without  preference.  It  has  been  said,  also,  that  it  exercises  pro- 
prietary corporate  powers  without  preference,  but,  when  pre- 
ferred stock  is  barred  from  voting,  this  part  of  the  definition  is 
not  exact,  as  the  common  stock  is  then  preferred  in  the  exercise 
of  proprietary  corporate  powers. 

Preferred  stock  commands  a  given  dividend  which  must  be 
paid  or  provided  to  be  paid  before  any  dividend  can  be  paid  on 
the  common  stock ;  usually,  on  dissolution,  it  commands  its  full 
face  share  in  the  assets  before  any  distribution  is  made  to  the 
common  stock.  Unless  there  is  express  provision  to  the  con- 
trary, preferred  stock  shares  equally  with  common  stock  in  all 
dividends  above  the  dividend  assigned  to  the  preferred  stock, 
after  the  common  stock  has  received  a  dividend  equal  to  that  pro- 
vided for  and  paid  to  the  preferred.  Where  it  is  desired  to  limit 
the  preferred  stock  to  its  preferential  dividend,  the  right  to  par- 
ticipate further  must  be  specifically  denied.  It  is  not  usual,  how- 
ever, for  preferred  stock  to  participate  in  dividends  beyond  the 
MOD.  Bus.  CORP.— 8 


114  MODERN   BUSINESS   CORPORATIONS. 

specified  per  cent.  Also,  unless  there  is  express  provision  to 
the  contrary,  preferred  stock  shares  equally  with  the  common 
stock  in  the  distribution  of  assets  on  the  dissolution  of  a  cor- 
poration, without  any  preference.  But  preference  in  this  re- 
spect is  usual,  and,  when  "desired,  should  be  specifically  stated 
in  the  articles.  The  common  arrangement  is  to  provide  for  the 
payment  of  the  par  value  of  the  preferred  stock  and  arrearage 
of  dividends  before  anything  is  paid  to  the  common  stock.  There 
must,  however,  be  statutory  authority,  direct  or  implied,  in 
order  to  be  able  to  create  a  preferred  lien  on  a  corporation's 
property.  That  is,  when  the  law  has  generally  defined  the 
rights  of  a  holder  of  stock,  no  modification  of  those  rights  can 
be  made  by  granting  preferences  to  one  class  of  stockholders  over 
another  without  express  statutory  authority.  But  when  the 
statute  does  not  define  the  rights  and  liabilities  of  stockholders, 
it  has  been  held  that  they  may,  without  such  express  authority, 
be  divided  into  the  classes  and  preferences  given  at  the  time  the 
stock  is  issued.  Sometimes  preferred  stock  is  made  by  statute 
to  carry  the  right  to  a  preference  in  the  distribution  of  assets, 
as  is  true  of  the  New  Jersey  law. 

There  may  be  one  or  more  classes  of  preferred  stock,  drawing 
the  same  per  cent,  or  different  per  cents  of  dividends,  the  divi- 
dend on  the  first  preferred  to  be  paid  in  preference  to  the  divi- 
dend on  second  preferred,  and  so  on.  When  preferred  stock 
draws  a  certain  dividend  and  participates  further  in  the  earn- 
ings together  with  the  common  stock,  as,  for  instance,  when  the 
preferred  stock  shall  draw  6  per  cent,  and  shall  share  with  the 
common  stock  in  all  earnings  distributed  as  dividends  above 
6  per  cent,  on  each  class,  it  is  usually  not  denied  the  right  to 
share  in  surplus  assets  above  those  required  to  satisfy  all  stock 
claims  on  the  dissolution  of  the  corporation.  Preferred  stock 
dividends  are  commonly  5,  6,  or  7  per  cent. 

Preferred  stock  can  claim  no  dividends  unless  there  is  a 
profit  being  made  by  the  corporation,  i.  e.,  unless  there  are  net 
earnings.  Net  earnings  for  a  given  year  are  the  gross  receipts 
less  the  cost  of  operating  a  plant  to  earn  the  receipts,  which  in- 
cludes all  productive  expenses  and  the  cost  of  restoring  the  plant 


CAPITAL   STOCK  AND  BONDS.  115 

to  the  condition  it  was  in  the  first  of  that  year.  This  definition 
permits  one  to  determine  whether  the  plant  is  being  run  at  a 
profit.  But  from  these  net  earnings  must  be  deducted  the  in- 
terest on  debts  and  such  non-productive  expenses  as  damage 
claims  paid.  The  remainder  is  the  real  profit  of  the  sharehold- 
ers out  of  which  they  are  entitled  to  dividends.  But,  if  the 
property  which  is  the  security  for  the  funded  debts  of  the  cor- 
poration deteriorates  in  value  so  that  the  corporation  is  not  able 
to  renew  the  debts  at  maturity,  that  is  a  justification  of  refusal 
to  pay  dividends  on  preferred  stock.  In  general,  the  right  to 
preferred  dividends  is  subject  to  the  just  discretion  of  the  di- 
rectors of  the  corporation;  and,  further,  the  right  is  usually 
confined  to  the  profits  in  each  particular  year,  i.  e.,  the  divi- 
dends are  not  chargeable  to  the  profits  of  the  next  succeeding 
year.  Or,  as  it  is  usually  expressed,  the  dividends  are  non- 
cumulative.  When  this  principle  is  remembered  in  connection 
with  the  principle  that  shareholders  are  entitled  to  dividends  out 
of  the  earnings,  it  is  apparent  that  directors  are  not  justified  in 
withholding  dividends  on  preferred  stock  if  the  corporation 
property  is  able  to  maintain  the  funded  debt.  But  it  has  been 
held  that  the  preferred  stock  contract  may  be  expressed  in  the 
way  of  a  guaranty  of  dividends  and  that  such  guaranty  will 
make  them  cumulative.  It  follows  then,  that  dividends  on  pre- 
ferred stock  may  be  made  either  cumulative  or  non-cumulative  in 
the  preferred  stock  contract,  and  that  the  intent  should  be  clearly 
expressed  in  the  articles  and  in  the  contract  as  printed  on  the 
preferred  stock  certificates. 

It  may  be  provided,  as  mentioned,  that  dividends  on  preferred 
stock  shall  be  either  cumulative  or  non-cumulative ;  that  is,  the 
dividends,  when  not  paid  in  any  given  year  or  series  of  years, 
shall  or  shall  not  accumulate  as  a  charge  against  the  profits 
of  the  corporation  and  shall  or  shall  not  be  paid  in  full  before 
any  of  the  profits  are  distributed  as  dividends  on  the  common 
stock.  It  may  also  be  provided  that  preferred  stock  may  be 
bought  in,  redeemed  by  the  corporation  at  par  or  with  a 
premium  of  several  per  cent,  above  par,  after  a  certain  time 
limit.  Preferred  stock  may  not  be  redeemed  when  so  doing 


116  MODERN    BUSINESS    CORPORATIONS. 

would  impair  the  capital  stock  or  defeat  the  rights  of  creditors. 
When  redeemed,  preferred  stock  is  still  a  part  of  the  capital 
stock  of  the  corporation,  but  it  no  longer  has  rights  in  the  divi- 
dends or  assets  of  the  corporation.  With  the  consent  of  the 
stockholders,  however,  it  may  be  reissued,  and  it  will  then  re- 
sume its  former  rights.  The  redemption  contract  clause  should 
read  so  that  the  redemption  is  discretionary  with  the  directors. 

Unless  express  provision  is  made  to  the  contrary,  preferred 
stock  carries  the  same  voting  and  other  proprietary  corporate 
powers  as  common  stock.  But  ordinarily  the  right  to  vote  and 
the  right  to  take  part  in  stockholders'  meetings  is  denied,  the 
right  to  manage  the  company  being  reserved  for  the  holders 
of  common  stock  against  the  right  to  receive  preferred  dividends 
on  the  part  of  the  preferred  stockholders.  Sometimes  it  is  pro- 
vided that  preferred  stock  shall  not  vote  so  long  as  preferred 
dividends  are  paid  regularly;  or  that,  if  they  are  not  paid  for 
two  or  three  successive  years,  then  the  preferred  stockholders 
shall  have  the  right  to  vote.  There  are  as  many  forms  of  pre- 
ferred stock  as  there  are  conditions  attached  to  its  issue.  All 
such  conditions,  all  preferences,  limitations  and  special  rights 
should  be  expressed  on  the  certificates  of  stock,  as  they  are  in 
the  nature  of  a  contract  between  the  corporation  and  the  pre- 
ferred stockholder.  If  a  person  buys  preferred  stock  on  whose 
certificate  the  conditions  are  plainly  stated,  he  is  estopped  from 
asserting  ignorance  of  the  conditions,  and  cannot  on  that  ac- 
count recover  against  the  corporation. 

Preferred  stock  may  be  provided  for  in  the  original  articles, 
or  by  consent  of  all  or  a  certain  proportion  of  the  stockholders, 
as  the  statute  or  articles  provide.  Its  issue  cannot  be  made  by 
authority  of  a  by-law  unless  under  statutory  authority.  There 
is  sometimes  a  statutory  limit  on  the  amount  of  preferred  stock 
that  can  be  issued  in  proportion  to  the  amount  of  common.  In 
New  Jersey,  Indiana  and  Ohio  it  is  provided  that  the  aggregate 
amount  of  preferred  stock  shall  not  exceed  double  the  amount 
of  common. 

Guaranteed  stock  is  the  stock  of  a  corporation  which  is 
leased  to  another  corporation,  the  lessee  guaranteeing  the  divi- 


CAPITAL   STOCK   AND   BONDS.  117 

dends  on  the  stock  of  the  lessor.  Cumulative  preferred  stock 
is  sometimes  unwisely  called  guaranteed  stock;  the  specific  use 
of  the  term  should  be  confined  to  the  definition  given. 

Convertible  stock  is  preferred  stock  which  is  issued  as  being 
redeemable  in  bonds  of  the  corporation  selling  it,  or  in  cash, 
at  the  option  of  the  holder.  There  must  be  express  statutory 
authority  for  issuing  convertible  stock,  as  in  New  Jersey.  Bonds 
convertible  into  stock  have  long  been  known,  but  the  opposite 
arrangement  is  recent. 

Founders'  shares  are  a  new  class  of  stock  in  America,  and  are 
not  in  general  use.  They  are  more  common  in  England.  To 
this  class  of  stock  belong  the  surplus  profits  of  a  corporation, 
or  a  portion  of  the  surplus  profits,  which  remain  after  paying 
fixed  dividends  on  the  preferred  and  common  stock,  and,  per- 
haps, after  setting  aside  also  a  given  amount  of  the  profits  for 
the  reserve  fund,  whenever  a  distribution  of  the  surplus  profits 
is  determined  upon.  Suppose  a  corporation  is  organized  with 
$500,000  capital  stock,  $300,000  of  which  is  preferred  and 
$200,000  common.  Suppose  $50,000  of  this  common  stock  is 
set  aside  as  founders'  shares,  and  after  6  per  cent,  is  paid  out  of 
the  net  earnings  as  a  dividend  on  the  preferred  stock,  the  sur- 
plus profits  are  to  be  divided  equally  between  the  common 
stock  and  the  founders'  shares.  This  would  make  the  founders' 
shares  worth  four  times  as  much  as  the  common  stock  on  the  basis 
of  earnings.  Founders'  shares  may  be  issued  under  the  New  Jer- 
sey law,  but  under  the  laws  of  most  of  the  other  states  they  are 
now  impossible.  There  is  no  particular  advantage  that  can  be 
derived  from  their  issue  that  cannot  be  had  from  the  judicious 
issue  of  common  or  preferred  stock.  Founders'  shares  are  com- 
monly used  as  compensation  for  promoters  or  others  who,  by 
lending  names  or  influence,  have  forwarded  the  interests  of  a 
corporation. 

Deferred  stock  claims  dividends  after  the  payment  of  divi- 
dends on  some  other  class  of  stock,  or  after  certain  obligations 
or  liabilities  of  the  corporation  are  paid.  It  is  an  unusual  form. 

Special  stock  is  a  kind  thus  far  issued  only  in  Massachusetts. 
Cook  on  Corporations  says:  "Its  characteristics  are  that  it  is 


118  MODERN   BUSINESS    CORPORATIONS. 

limited  in  amount  to  two-fifths  of  the  actual  capital ;  it  is  sub- 
ject to  redemption  at  par  after  a  fixed  time,  to  be  specified  in 
the  certificate;  the  corporation  is  bound  to  pay  a  fixed  half- 
yearly  sum  or  dividend  upon  it  as  a  debt;  the  holders  of  it  are 
in  no  event  liable  for  the  debts  of  the  corporation  beyond  the 
amount  of  their  stock,  and  the  issue  of  a  special  stock  makes 
all  the  general  stockholders  liable  for  all  debts  and  contracts 
of  the  corporation  until  the  special  stock  is  fully  redeemed/' 

The  foregoing  are  classes  of  stock  distinguished  from  one 
another  on  account  of  the  conditions  that  attach  to  their  issue. 
Stock  is  further  divided  in  kinds  with  reference  to  the  status 
of  the  stock  with  reference  to  its  issue,  per  se. 

Unissued  stock  is  the  capital  stock  authorized  in  the  articles 
of  incorporation,  or  that  part  of  it  which  has  not  been  exchanged 
for  a  consideration,  and  in  which  no  person  has  yet  acquired 
property  rights.  It  merely  represents  the  right  to  admit  new 
stockholders,  and  has  no  value  in  itself.  It  has  no  active  stock 
rights,  and  is  not  an  asset  of  the  corporation. 

Issued  and  outstanding  stock  is  that  part  of  the  capital  stock 
which  has  been  bought  and  paid  for,  and  to  which  the  original 
purchaser  or  the  purchaser  from  him  is  usually  entitled  without 
further  pecuniary  obligation  to  the  corporation.  It  is  sup- 
posed to  carry  with  it  an  interest  in  the  property  of  the  corpo- 
ration equal  in  value  to  the  consideration  paid  for  the  stock. 
This  is  not  always  true,  and,  in  fact,  it  is  usually  true  only  when 
all  the  issued  and  outstanding  stock  has  been  issued  at  the  same 
price,  and  the  assets  of  the  corporation  have  remained  equal  in 
value  to  the  amount  received  for  all  the  stock  issued.  The 
equality  of  interest  and  value  of  the  consideration  paid  there- 
for is  shortlived  in  any  corporation.  As  soon  as  money  is  put 
into  manufacturing  property  and  machinery  the  value  of  the 
property  and  machinery  is  usually  less  than  the  price  paid  for 
it  until  the  success  of  the  project  as  a  money-making  investment 
is  demonstrated.  That  is,  if  it  were  necessary  to  sell  the  property 
and  machinery  at  a  forced  sale,  it  would  usually  bring  less  than 
was  paid  for  it.  So  if  the  business  project  is  a  failure,  the  worth 
of  stock  is  likely  to  be  much  less  than  was  paid  for  it.  Further, 


CAPITAL   STOCK   AND   BONDS.  119 

if  the  project  turns  out  to  be  an  exceptionally  good  money 
maker,  the  growth  of  the  plant  and  business  will  rapidly  put 
the  value  of  the  interest  represented  by  stock  much  in  excess  of 
what  was  paid  for  the  stock,  an£  if  a  large  dividend  is  being 
paid  on  the  stock  the' market  price  may  be  still  higher  than  the 
value  of  tlje  interest  as  represented'  by  the  assets  as  shown  by 
jwie  books.  The-  rights  *of  iss'ued  and  outstanding  stock  are  not 
merely  potentfal,  'but  actual,  according  to  its  class  and  the  con- 
ditions of  issue  as  defined  in  the  statute,  in  the  articles,  or  in  the 
other  authority  under  which  it  is  issued. 

Treasury  stock  is  issued  and  outstanding  stock  that  has  come 
into  possession  of  the  corporation  which  issued  it  by  purchase, 
donation,  or  in  liquidation  of  a  debt.  If  it  has  been  issued  full 
paid  it  remains  so,  even  if  sold  again  below  par,  and  it  is  con- 
sidered an  asset  of  the  corporation  for  bookkeeping  purposes. 
But  such  stock,  so  long  as  it  is  held  by  the  corporation  or  its 
representatives  as  treasury  stock,  neither  participates  in  divi- 
dends nor  in  the  meetings  of  the  corporation  as  voting  stock, 
though  it  still  represents  a  paid-for  interest  in  the  property  of 
the  corporation.  The  creation  of  treasury  stock  is  often  made  a 
device  for  selling  stock  below  par  and  at  the  same  time  con- 
stituting such  stock  legally  full-paid.  A  corporation  will  be 
organized  for  the  purpose  of  taking  over  the  business  or  property 
of  another  corporation,  or  of  individuals,  and  the  new  corpora- 
tion will  issue  its  stock  full-paid  in  exchange  for  the  business 
or  property  of  a  certain  valuation.  Then  the  seller  will  give 
back  to  the  buyer  corporation  part  of  the  stock  as  treasury  stock, 
to  be  disposed  of  as  the  directors  may  determine.  Or  it  may  be 
put  in  the  hands  of  trustees  for  sale  or  disposition  under  certain 
conditions,  or  as  they  or  the  directors  may  determine.  Such 
stock  is  usually  sold  below  par,  or  it  is  given  to  well-known  men 
for  the  use  of  their  names  and  influence  in  promoting  the  wel- 
fare of  the  business,  or  otherwise,  and  such  stock  is  legally  full- 
paid  and  exempt  from  all  liability.  It  may  also  be  given  away 
as  a  bonus  with  bonds  or  preferred  stock  with  the  advantage  over 
common  stock  that  there  is  no  liability. 

Treasury  stock  may  be  assigned  to  the  corporation  by  name, 


120  MODERN    BUSINESS    CORPORATIONS. 

or  to  "the  treasurer  of"  the  corporation,  or  to  the  trustees  who 
are  to  hold  the  stock.  The  secretary  makes  the  usual  transfer 
on  the  stock  book  and  cancels  the  certificates  turned  in.  When 
the  directors  sell  the  stock  again,  the  treasurer,  if  the  stock  is 
in  his  name  or  in  the  corporation's  name,  orders  the  secretary 
to  issue  new  certificates  to  the  purchasers.  When  treasury  stock 
is  in  the  hands  of  trustees  it. does  not  appear  on  the  books  of 
the  corporation  until  it  is  sold,  when  the  certificates  are  assigned 
to  the  purchasers  and  the  money  is  turned  over  to  the  treasurer. 
Overissued  stock  is  that  issued  in  excess  of  the  total  amount 
of  capital  shares  authorized  by  the  articles  of  association.  Such 
stock  is  void  under  all  circumstances. 

§  60.    REGISTRARS  AND  TRANSFER  AGENTS. 

In  the  history  of  corporate  practices  there  have  been  many 
fraudulent  overissues  of  stock,  so  that  many  honest  corporations 
have  sought  to  reassure  the  public  and  to  guarantee  it  against 
fraud  by  appointing  reputable  trust  companies  to  act  as  regis- 
trars and  transfer  agents  for  their  stock.  The  reputation  of  the 
trust  company  has  a  great  deal  to  do  with  the  guarantee  that 
the  stock  issues  are  regular,  for,  if  it  is  inclined  to  be  unscrupu- 
lous, it  can  assist  a  corporation  in  defrauding  the  public.  A 
thoroughly  reputable  trust  company  will  not  undertake  to 
register  an  issue  of  stock  unless  it  is  convinced  of  the  good 
repute  of  the  directors  and  the  manager  of  the  corporation. 
Where  the  directors  of  a  corporation  are  but  little  known,  but 
are  known  favorably  to  the  officers  of  a  trust  company  which  is 
widely  and  favorably  known,  the  sale  of  the  corporation  securi- 
ties is  often  greatly  assisted  by  the  appointment  of  that  trust 
company  as  registrar  and  transfer  agent.  Some  of  the  stock  ex- 
changes, including  the  New  York  stock  exchange,  insist  that 
stock  shall  be  signed  by  a  trust  company  or  other  reputable 
financial  agency  as  registrar  before  they  will  list  the  stock  of 
the  corporation  seeking  to  have  its  securities  listed.  The  specific 
duty  of  a  transfer  agent  is  to  make  the  transfers  of  the  stock  of 
a  corporation,  being  satisfied  of  their  regularity  and  freedom 


CAPITAL   STOCK   AND   BONDS.  121 

from  fraud.  The  specific  duty  of  a  registrar  is  to  sign  the  new 
certificates  of  stock  presented  by  the  transfer  agent  as  evidence 
that  there  is  not  an  overissue  of  stock  and  that  the  transaction 
is  otherwise  regular,  and  to  keep  a  register  of  such  stock,  with 
the  name  and  address  of  the  owners,  at  the  registration  office. 
It  is  apparent  that  the  work  of  transfer  agent  and  registrar  may 
be  performed  by  the  same  financial  agent  or  by  separate  agents 
for  each  duty,  or  that  the  corporation  itself  may  do  the  trans- 
ferring, employing  an  agent  for  the  sole  duties  of  registrar.  It 
stands  to  reason  that  a  transfer  agent  or  registrar,  when  em- 
ployed independently,  should  be  independent  in  fact,  and  should 
have  no  collusive  connection  with  the  corporation  by  which  em- 
ployed. As  at  present  conducted,  the  work  performed  by  regis- 
trars is  not  as  much  of  a  safeguard  as  it  should  be.  Mr.  Jordan 
J.  Kollins  has  said:  "According  to  the  practice  in  New  York, 
a  registrar  seldom  requires  more  than  the  exhibition  of  a  can- 
celled certificate  of  stock  for  a  given  number  of  shares,  and  the 
presentation  therewith,  either  by  the  issuing  corporation  or  by 
its  transfer  agent,  of  a  new  certificate  for  the  same  number  of 
shares  in  the  name  of  the  transferee  of  the  cancelled  certificate. 
Thereupon  the  registrar  signs  the  new  certificate  without  re- 
quiring other  evidence  of  the  correctness  of  the  transfer."  As 
transfer  agents  and  registrars  are  generally  appointed  and  as- 
sume their  work  in  pursuance  of  a  resolution  passed  by  the 
directors  of  the  employing  corporation,  the  relation  of  principal 
and  agent  obtains  without  specific  and  detailed  contract  beyond 
the  mere  carrying  out  of  the  resolution  permitting  the  employ- 
ment and,  perhaps,  arranging  for  the  compensation.  The  lack 
of  specific  conditions  under  which  the  work  is  to  be  performed, 
and  the  present  looseness  of  conducting  the  work,  make  the  field 
of  transfer  and  register  agency  one  worthy  the  attention  of 
those  engaged  in  bettering  business  methods. 

Owing  to  the  comparative  indefmiteness  and  lack  of  differenti- 
ation in  the  work  of  these  agencies,  their  duties  and  liabilities 
have  never  been  fixed  clearly  either  by  law  or  custom.  On  a 
principle  of  the  law  of  agency  a  principal  corporation  has  been 
held  to  be  liable  to  a  good  faith  purchaser  for  value  in  a  case 


THE 


122  MODERN"   BUSINESS    CORPORATIONS. 

where  a  registrar  fraudulently  allowed  an  overissue  of  stock. 
This  was  in  the  well-known  case  of  the  New  York  and  New 
Haven  Railroad,  which  had  $3,000,000  capital  represented  by 
30,000  shares  of  stock.  Schuyler,  who  was  president  of  the  com- 
pany and  its  transfer  agent,  sold  and  issued  certificates  repre- 
senting an  additional  20,000  shares,  or  $2,000,000.  The  courts 
have  not  handed  down  decisions  which  would  warrant  the  asser- 
tion that  the  trust  company  or  other  agency  acting  as  registrar 
and  transfer  agent  could  itself  be  held  liable  for  delinquencies 
or  fraud  in  performing  its  work.  But,  as  the  purpose  of  employ- 
ing such  an  agent  is  to  guarantee  safety  and  regularity,  the 
agent  should  be  held  liable  for  neglect.  There  are  certain  deci- 
sions which  support  this  view  (Jarvis  v.  Breach  Co.,  43  1ST.  E. 
68,  31  L.  R.  A.  776 ;  Windram  v.  French,  24  N.  E.  914,  8  L.  R. 
A.  750).  It  has  been  held  that  when  the  word  "countersigned" 
has  been  used  by  the  registrar,  the  registrar  is  liable,  because 
countersigning  is  attesting  the  authenticity  of  an  instrument 
(Fifth  Ave.  Bank  v.  Railroad  Co.,  33  N.  E.  378,  19  L.  R.  A. 
331).  From  the  fact  that  a  corporation  may  be  held  liable  for 
fraudulent  issues  of  stock,  it  follows  that  the  stockholders  may 
be  protected  by  having  a  trustworthy  agent  distinct  from  the 
officers  of  the  corporation,  employed  for  the  purpose  of  register- 
ing and  transferring  stock.  When  the  duties  and  liabilities  of 
transfer  agents  and  registrars  are  clearly  defined  by  judicial  de- 
cisions or  statutes,  their  services  will  be  an  important  part  of 
business  mechanism.  Mr.  Rollins,  a  New  York  lawyer,  who  was 
quoted  before,  has  suggested  that  the  powers  of  trust  companies, 
with  reference  to  their  acting  as  registrar  and  transfer  agent, 
be  expressed  in  the  statutes  as  follows:  "To  transfer,  register 
and  countersign  certificates  of  stock,  bonds  and  other  evidence 
of  indebtedness  of  corporations,  with  liability  to  such  corpora- 
tions and  to  the  owners  or  holders  of  such  certificates  of  stock, 
stock,  bonds  or  other  indebtedness  of  corporations  solely  for  the 
negligence  or  willful  misconduct  of  its  officers  in  reference  to 
such  certificates  of  stock,  stock,  bonds  or  other  evidences  of  in- 
debtedness, or  in  the  appointment  or  employment  of  its  agents, 
clerks  or  employes  dealing  therewith."  Because  both  corpora- 


CAPITAL  STOCK  AND  BONDS.  123 

tions  and  their  agents  have  tried  to  avoid  the  responsibility  for 
illegal  issues  and  transfers,  a  law  of  this  kind  would  assist 
largely  in  distinguishing  the  respective  liabilities  of  the  corpora- 
tion and  its  agent. 

§  61.    INCIDENTS  OF  ISSUE  AND  TRANSFER  OF  STOCK. 

As  was  said,  certificates  of  stock  are  the  tangible  evidence  of 
rights  to  a  certain  share  in  the  capital,  franchises  and  dividends 
of  a  corporation.  Certificates  should  not  be  issued,  therefore, 
till  the  consideration  for  which  they  are  given  is  paid  in  full.  A 
corporation  should  issue  receipts  to  a  subscriber  for  stock  for 
part  payments,  and,  when  full  payment  is  completed,  should 
exchange  the  certificates  for  the  receipts.  Receipts  may  be  made 
transferable,  if  that  is  desired.  If  a  person  presenting  a  certifi- 
cate for  transfer  is  without  doubt  the  legal  owner,  he  may  de- 
mand and  enforce  a  transfer.  The  corporation  or  its  agent 
should  insist  upon  the  surrender  of  an  old  certificate  when  a  new 
one  is  to  be  issued  in  its  place,  and  should  write  or  stamp  "can- 
celled" on  its  face  so  that  it  may  not  thereafter  get  into  the 
hands  of  a  lona  fide  holder  for  value.  Returned  certificates 
should  be  pasted  to  the  stubs  from  which  they  were  detached. 
When  a  certificate  is  presented  by  an  assignee  it  will  contain, 
after  the  assignment,  the  signature  of  the  previous  owner.  In 
order  to  identify  the  signatures  of  stockholders  who  may  thus 
assign  their  stock  and  not  appear  in  person  to  make  the  trans- 
fer, a  card  system  of  the  signatures  of  stockholders  in  large  cor- 
porations is  sometimes  kept  by  the  secretary  or  transfer  agent 
of  the  corporation.  The  certificates  should  be  completely  filled 
out,  on  issuance,  with  the  name  of  the  purchaser  and  the  num- 
ber of  shares,  etc.,  and  should  contain  the  signatures  of  the 
proper  officers  and  the  corporate  seal.  The  stub  should  also  be 
completely  filled,  and  the  one  who  receives  the  stock  certifi- 
cate should  receipt  for  it  on  the  stub.  These  are  precautionary 
measures,  since  it  is  not  absolutely  necessary  that  a  stockholder 
have  a  certificate  to  be  entitled  to  vote  and  receive  dividends. 
But  on  account  of  the  liabilities  to  which  a  corporation  may  be 


124  MODERN    BUSINESS    CORPORATIONS. 

subjected  through  carelessness  or  fraud,  these  matters  should  be 
carefully  attended  to.  They  are  part  of  the  duties  of  the  secre- 
tary. When  a  certificate  is  lost  or  destroyed,  and  the  corporation 
is  called  upon  to  issue  a  new  one  in  its  stead,  the  fact  that  the 
new  certificate  is  issued  in  place  of  the  old  one  which  was  lost 
or  destroyed  should  be  written  on  the  face  of  the  new.  But  be- 
before  issuing  a  new  certificate  there  should  be  fairly  reasonable 
assurance  that  the  old  will  not  turn  up  in  the  hands  of  a  good 
faith  purchaser  for  value,  and  the  corporation  should  require 
an  indemnity  bond  to  be  given  by  the  person  by  whom  the  new 
certificate  is  owned,  protecting  the  corporation  from  loss  in  case 
the  old  certificate  appears  in  the  hands  of  a  bona  fide  pur- 
chaser. Lost  certificates  that  have  been  assigned  in  blank  are 
particularly  dangerous.  A  lost  certificate  should  be  advertised 
for  at  intervals  for  several  weeks ;  this  may  cause  its  return  or 
prevent  a  dishonest  holder  from  selling  it.  It  is  always  best, 
when  a  certificate  is  lost  and  a  new  one  is  demanded,  that  the 
issuing  officer  get  authority  from  the  directors  to  issue  the  new 
certificate.  Should  the  corporation  suffer  loss,  the  officer  might 
otherwise  be  held  responsible  and  liable  for  any  loss.  If  the 
certificate  lost  represent  a  great  value,  it  is  sometimes  advisable 
for  the  directors  to  refuse  to  issue  a  new  certificate.  The  owner 
of  the  lost  certificate  will  then  take  the  matter  to  court,  and  the 
court  will  usually  order  a  new  certificate  issued,  which  will  re- 
lieve the  corporation  from  liability.  The  rights  of  trustees  and 
other  third  persons  to  make  transfers,  and  of  courts  to  order 
transfers,  should  be  carefully  investigated,  else  the  corporation 
may  be  held  liable  for  illegal  transfers. 

Certificates  of  stock  are  not  negotiable  instruments,  though 
they  are  sometimes  called  quasi-negotiable.  The  law  of  negotia- 
ble instruments  does  not  therefore  apply  to  them.  But  the  pro- 
tection of  the  doctrine  of  estoppel  has  been  thrown  about  them 
to  such  an  extent  that  the  good  faith  purchaser  of  stock  is  as 
safe  under  almost  all  circumstances  as  if  he  had  purchased  a 
promissory  note.  This  is  especially  true  where,  through  the 
negligence  of  an  owner,  a  certificate  with  an  assignment  in  blank 
has  come  into  the  hands  of  a  good  faith  purchaser  for  value  who 


CAPITAL    STOCK   AND   BONDS.  125 

has  had  no  notice  of  the  loss  or  theft.  Here  the  first  owner  is 
estopped  from  asserting  his  rights.  A  stockholder  is  required 
to  exercise  reasonable  care  that  his  certificates  are  protected  from 
loss  or  theft,  and,  if  they  are  lost  or  stolen  without  neglect  on 
his  part,  the  general  rule  of  law  will  apply  that  his  right  is  su- 
perior to  that  of  any  other  person  who  may  have  acquired  the 
certificates  for  value  in  good  faith. 

§62.    BONDS. 

Bonds  are  variously  classified,  according  to  their  security, 
purpose,  the  contracts  of  payment,  redemption,  etc.  The  security 
of  the  bond  will  be  mentioned  in  the  wording  of  the  bond.  It 
may  be  either  a  personal  contract  or  a  lien  on  property,  or  both. 
A  corporation  may  issue  with  or  without  specific  security,  a 
bond  which  is  indorsed  or  guaranteed  by  another  corporation, 
and  the  indorsement  or  guarantee  has  the  same  effect  as  the  in- 
dorsement or  guarantee  on  a  note.  Such  bonds  are  known  as 
"guaranteed"  or  "indorsed"  bonds.  Bonds,  as  well  as  notes,  may 
be  assigned  without  recourse,  or  the  liability  may  be  specifically 
limited.  Personally  secured  bonds  have  as  a  resource  for  pay- 
ment on  execution,  whatever  property  the  making  and  indors- 
ing or  guaranteeing  corporations  have  that  is  not  given  as  lien 
security,,  or  that  remains  after  the  specific  liens  are  satisfied. 
It  makes  no  difference  whether  the  liens  are  given  before  or 
after  the  personally  secured  bonds  are  issued,  the  satisfaction  of 
the  liens  must  come  first.  Personally  secured  bonds  are  therefore 
not  usually  as  safe  an  investment  as  lien  bonds. 

There  are  many  kinds  of  bonds  based  on  lien  security.  They 
usually  bear  the  name  of  the  kind  of  property  against  which  the 
lien  runs.  The  property  is  mortgaged,  and  the  mortgage  is  usu- 
ally executed  to  some  disinterested  party,  such  as  a  trust  com- 
pany or  banking  house,  as  trustee,  which  holds  the  security  for 
the  bond  purchasers  and  administers  it  in  case  of  necessity. 
Sometimes  the  mortgage  is  executed  to  one  of  the  bondholders  as 
trustee,  for  himself  and  all  others  interested.  A  reliable  trust 
•company,  however,  is  safer  and  better  as  trustee. 


126  MODERN    BUSINESS    CORPORATIONS. 

A  general  mortgage  bond  has  for  security  a  mortgage  on  all 
the  properties  of  a  corporation. 

A  real  estate  ~bond  has  for  security  a  mortgage  on  specific  real 
estate,  usually  separated  from  the  other  property  of  the  corpora- 
tion issuing  it.  Railroad  land  grants  from  the  government  are 
often  used  in  this  manner  by  the  railroads  receiving  them. 

A  blanket  mortgage  bond  has  for  security  all  of  several  prop- 
erties or  parts  of  a  property,  on  all  or  certain  of  which  previous 
mortgages  have  been  given.  It  is,  therefore,  more  or  less  a  sec- 
ondary bond  as  to  security. 

When  several  independent  corporate  properties  are  consoli- 
dated, each  having  a  bond  issue  outstanding  against  it,  it  may 
be  desirable  to  raise  funds  to  consolidate  the  debt  against  them  as 
well  as  to  provide  means  for  financing  the  new  corporation.  A 
mortgage  is  then  given  against  the  consolidated  properties,  con- 
solidated mortgage  bonds  are  issued,  the  old  bonds  are  paid  and 
the  surplus  funds  are  used  as  the  corporation  requires. 

Divisional  bonds  are  a  kind  of  railway  bond,  having  as  secur- 
ity the  property  of  a  division  of  a  railway  system.  A  "division" 
is  a  smaller  road  which  has  become  part  of  a  consolidated  rail- 
way. Divisional  bonds  are  bonds  which  have  not  been  refunded 
into  consolidated  bonds. 

The  foregoing  bonds  have  for  security  a  mortgage  on  some 
form  of  real  property.  A  bond  issue  may  likewise  be  based  on 
personal  property.  Equipment  bonds  are  of  this  kind.  In  order 
to  provide  funds  for  the  purchase  of  machinery  or  other  equip- 
ment, a  company  requiring  such  will  make  arrangement  with  the 
manufacturer  or  other  seller  to  take  payment  in  bonds  secured 
by  a  mortgage  on  the  equipment  purchased.  These  bonds  are 
often  underwritten  and  put  on  the  general  market.  As  they  usu- 
ally run  for  a  short  time  and  bear  a  good  rate  of  interest  they 
find  a  ready  market. 

The  collateral  trust  bond  is  also  based  on  personal  property. 
It  has  for  security  stocks,  other  bonds,  or  mortgages  deposited 
with  a  trustee,  who  holds  a  contract  which  provides  for  the  sale 
of  the  securities  in  case  of  delinquency  in  payment  of  principal 
or  interest.  This  kind  of  bond  is  the  same  as  a  collateral  note. 


CAPITAL   STOCK   AND   BONDS.  127 

The  contract  of  trust  or  collateral  security  usually  permits  the 
maker  to  substitute  securities  of  equal  value  for  those  deposited, 
if  the  trustee  assents. 

Another  personal  property  bond  is  the  car-trust  bond.  A  car- 
trust  is  a  business  concern  which  buys  cars  from  the  manufac- 
turer and  leases  them  to  a  railroad.   The  railroad  pays  a  certain 
periodical  rent  for  a  given  time,  after  which  it  comes  into  abso- 
lute ownership  of  the  cars.  The  car-trust  company  issues  bonds 
whose  security  is  the  cars  leased  to  the  railroad,  and  whose  pay- 
ment depends  upon  the  payments  of  rent  by  the  road. 
.    Debenture  bonds  are  of  several  kinds.  Debenture  means  debt, 
and  has  no  special  significance  as  applied  to  this  kind  of  credit 
instrument.    Those   debentures  issued  by  financial  companies 
differ  from  those  issued  by  railroads.   The  former  are  a  kind  of 
collateral  trust  obligation,  bonds  and  mortgages  owned  by  the 
company  being  deposited  as  security  for  payment  of  principal 
and  interest.   These  debenture  bonds  are  issued  to  obtain  funds 
for  the  purchase  of  other  bonds  and  mortgages,  which  in  turn 
may  be  used  as  security  for  another  debenture  bond  issue.  Kail- 
1  road  debentures  are  a  last  lien  on  the  property  and  income  of  a 
road,  being  junior  to  other  mortgages,  and  indeed  are  often  un- 
/  secured.   Payment  of  interest  depends  on  the  surplus  net  earn- 
!  ings  of  the  road.   While  financial  company  debentures  are  gen- 
( erally  good  investments,  railroad  debentures  are  often  poor. 
1  They  are,  in  fact,  similar  only  in  name. 

The  income  bond  has  its  principal  secured  by  a  mortgage  on 
the  property  of  the  company  issuing  it,  but  its  claim  is  junior  to 
the  claims  of  other  mortgage  bonds.  The  interest  depends  upon 
the  surplus  net  earnings  or  income,  whose  amount  is  determined 
by  the  board  of  directors  of  the  issuing  concern. 

An  assumed  bond  is  strictly  an  obligation  of  a  subsidiary  cor- 
poration, whose  stock  or  property  has  been  acquired  and  is  pos- 
sessed by  the  main  company.  In  this  bond  the  subsidiary  cor- 
poration assumes  the  payment  of  principal  and  interest.  These 
bonds  are  similar  to  a  guaranteed  bond  and  a  divisional  bond, 
and  are  sometimes  spoken  of  by  the  latter  name.  A  divisional 
bond,  however,  is  usually  a  direct  obligation  of  the  main  cor- 


128  MODERN   BUSINESS    COEPOEATIOXS. 

poration.  Sometimes  the  main  corporation  takes  care  of  an  as- 
sumed issue  without  being  directly  obligated  to  do  so. 

Improvement  bonds,  purchase-money  bonds,  and  bonds  hav- 
ing various  other  names  are  issued.  Among  other  names  that  ap- 
ply to  various  issues,  some  of  the  more  common  kinds  are  as  fol- 
lows: 

A  participating  bond  is  a  rather  new  kind  which  is  entitled  to 
participate  in  the  profits  of  the  corporation  beyond  the  fixed  rate 
of  interest. 

A  joint  bond  is  issued  and  assumed  by  two  or  more  corpora- 
tions. The  Great  Northern-Northern  Pacific  joint  collateral 
trust  fours,  secured  by  deposit  of  C.  B.  &  Q.  railroad  stock,  are 
the  joint  obligation  of  the  two  controlling  companies. 

An  extended  bond  is  an  issue  which  has  matured,  but  by  agree- 
ment with  the  owners  has  been  extended  for  a  further  period  in- 
stead of  creating  a  new  issue  to  succeed  it. 

A  refunding  bond  is  a  bond  issue  created  to  pay  and  cancel 
a  maturing  issue  of  bonds,  and  to  supply  additional  capital,  and, 
further,  usually,  to  reduce  fixed  charges. 

A  prior  lien  bond  may  or  may  not  be  a  first  security  on  the 
property  of  a  corporation.  It  may  be  a  junior  issue  merely  prior 
to  some  other  junior  issue.  For  example,  the  Erie  railroad 
prior  lien  fours  are  simply  prior  to  the  general  lien  fours,  both 
being  part  of  an  issue  of  a  first  consolidated  mortgage. 

An  underlying  bond  is  a  term  used  to  express  the  precedence 
in  security  of  one  issue  of  bonds  over  another.  It  may  or  may 
not  be  a  first  mortgage  bond. 

The  name  a  bond  bears  is  not  so  important  as  the  contract 
under  which  it  is  issued.  It  is  seen  that  the  name  of  a  bond 
means  nothing  as  to  value  or  security.  The  careful  investor 
will  always  study  the  contract,  and  the  careful  and  honest  .cor- 
poration will  always  have  framed  such  a  contract  as  will  bear  in- 
vestigation. The  investment  status  of  any  bond  depends  upon 
the  value  and  stability  of  the  property  it  represents  and  the 
character  of  the  corporation  issuing  it.  There  may  exist  at  the 
same  time  different  kinds  of  bonds  with  the  same  property  as  se- 
curity. The  intending  bond  purchaser  should  know  all  about 


CAPITAL   STOCK   AND   BONDS.  129 

the  various  obligations  of  the  concern  in  which  he  may  be  finan- 
cially interested.  The  Rock  Island  Railway  Company,  for  in- 
stance, has  some  seventy  bond  issues  on  the  system,  of  almost  all 
degrees  of  value  and  security.  "There  are  first  mortgages  of  very 
inferior  worth,  and  bonds  not  mortgages  at  all  but  yet  of  high 
standing/'  says  Mr.  Moody.  "How  easy  it  is,  therefore,  to  err 
in  passing  upon  bonds  on  this  system  unless  a  good  deal  of  gen- 
eral fundamental  knowledge  is  first  acquired." 

With  reference  to  the  kind  of  money  in  which  bonds  are  pay- 
able, they  are  "gold"  bonds,  or  "legal  tender"  bonds.  The  con- 
tract of  payment  in  the  former  reads  that  they  shall  be  payable 
"in  gold  coin  of  the  United  States,  of  present  weight  and  fine- 
ness." This  is  the  best  guaranty  of  the  stability  of  the  money 
payment  value  of  the  bonds  that  can  be  made.  Legal  tender 
bonds  are  those  payable  in  any  kind  of  money  that  is  legal  tender 
for  the  payment  of  debts. 

"Coupon"  bonds  are  so  called  from  the  coupons,  or  separate 
interest  notes  which  are  attached  to  the  bond  certificate.  When 
an  instalment  of  interest  becomes  due,  the  coupon  calling  for  it 
is  "clipped"  from  the  other  coupons  and  is  presented  for  pay- 
ment in  the  same  way  as  any  other  note.  Coupon  bonds  and  the 
coupons  are  payable  to  bearer.  "Registered"  bonds  have  the  num- 
ber of  the  bond,  the  amount,  and  the  name  and  address  of  the 
owner,  registered  at  the  office  of  the  issuing  concern  or  at  the  of- 
fice of  a  "fiscal,"  or  financial  agent,  such  as  a  trust  company.  The 
contract  for  the  payment  of  interest  is  continued  only  in  the 
wording  of  the  principal  obligation,  and  payment  of  interest  is 
made  by  check  to  the  registered  holder.  Registered  bonds  are  not 
passed  by  delivery,  but  by  transfer  recorded  in  the  books  of  the 
registrar  by  the  registered  holder.  Doubt  as  to  the  question  of 
ownership  in  case  of  theft,  loss,  fraud,  etc.,  is  minimized  in  the 
case  of  registered  bonds.  A  bond  may  be  issued  so  as  to  be 
either  a  registered  or  coupon  bond,  as  in  the  case  of  the  Minne- 
sota, Saint  Croix  and  Wisconsin  Railroad  Company's  five  per- 
cent, income  mortgage  gold  bond.  The  interest  and  transfer 
contract  reads  as  follows:  "This  bond  draws  interest  from  the 
MOD.  Bus.  CORP.— 9 


130  MODERN   BUSINESS    CORPORATIONS. 

first  day  of  May,  A.  D.  1885,  until  the  same  is  paid,  at  the  rate 
of  five  per  centum  per  annum,  payable  at  the  office  of  said  Com- 
pany in  the  city  of  New  York  and  State  of  New  York,  on  the 
presentation  and  surrender  of  said  coupons  as  they  severally 
become  due  according  to  their  tenor.  It  and  each  of  its  coupons 
shall,  unless  this  bond  is  registered,  pass  by  delivery;  but  if 
registered,  then  by  transfer,  recorded  in  the  books  of  the  com- 
pany, by  the  registered  holder.  After  registration  of  ownership 
is  certified  on  this  bond  by  said  Company's  Eegister,  no  transfer, 
except  and  until  recorded  in  its  books,  shall  be  valid,  unless  the 
last  previous  transfer  shall  have  been  to  bearer.  This  bond  is 
subject  to  successive  registrations  and  transfers  to  bearer  at  the 
option  of  its  lawful  owner ;  but  after  such  registration  and  certifi- 
cation thereof  on  this  bond,  interest  will  be  paid  to  the  regis- 
tered holder  only  upon  a  proper  voucher  therefor." 

"Convertible"  bonds  are  those  in  which  it  is  optional  with  the 
holder  at  a  certain  time  or  under  certain  conditions  to  convert 
his  bond  into  some  other  form  of  liability,  i.  e.,  into  stock  or 
some  other  kind  of  bond. 

"Kedeemable"  bonds  are  those  made  payable,  at  the  option  of 
the  issuing  company,  at  a  certain  period  or  periods  before  the 
time  of  maturity.  Thus,  a  fifty-year  bond  may  be  made  payable 
at  the  option  of  the  maker  at  a  certain  time  in  any  year  after 
thirty  years  have  elapsed.  The  bondholder  cannot  make  a  de- 
mand for  payment  until  the  end  of  the  fifty  years,  but  the  com- 
pany, if  it  choose,  may  pay  the  bond  any  time  after  thirty  years. 


PART  VI. 


STOCKHOLDERS. 


131 


STOCKHOLDERS. 

§  63.    Stockholders:  Rights,  Powers,  Liabilities. 
64.     Stockholders'  Meetings. 

§63.    STOCKHOLDERS. 

The  relations  of  stockholders  to  a  corporation  are  contract 
relations.  The  stockholders  contribute  their  funds,  property,  or 
services,  and,  in  return  therefor,  they  are  entitled  to  share  in 
the  corporation's  profits.  The  contract  is  between  the  corporate 
person,  or  corporation,  and  the  stockholders.  The  fact  that  the 
stockholders  have  power  to  choose  the  directors  does  not  alter 
their  relations  to  the  corporation,  as  this  power  is  only  a  practi- 
cal provision  of  the  law  for  the  selection  of  agents  who  are  to 
represent  the  corporation  and  carry  on  its  business. 

The  general  rights  and  powers  of  stockholders  are  to  meet  at 
stockholders'  meetings ;  to  propose  matters  of  corporate  or  busi- 
ness interest  for  consideration,  and  to  discuss  and  vote  on  any 
matters  submitted ;  to  elect  directors,  officers  and  agents  for  the 
corporation ;  to  participate  in  the  profits  of  the  business ;  to  keep 
the  corporate  property  and  funds  from  being  diverted  from  their 
original  purpose ;  to  inspect,  personally  or  by  attorney,  the  books 
and  records  of  the  corporation  (this  right  is  much  modified  by 
recent  legislation  and  by  judicial  decisions) ;  to  act  on  any 
changes  proposed  to  be  made  in  the  corporate  purposes,  or  gen- 
erally to  amend  the  articles ;  to  make,  amend  and  repeal  the  by- 
laws; when  the  corporation  increases  its  capital  stock,  to  sub- 
scribe for  new  stock  in  proportion  to  the  number  of  old  shares 
held ;  if  the  corporation  becomes  insolvent,  to  have  the  corporate 
assets  applied  to  the  payment  of  the  corporation's  debts;  to 
bring  about  a  dissolution  of  the  corporation ;  to  share,  on  disso- 
lution of  the  corporation,  in  any  assets  that  are  left  after  the 

133 


134  MODERN   BUSINESS   CORPORATIONS. 

debts  are  paid.  Stockholders  commonly  have  the  right  to  have 
certificates  of  stock  and  to  sell,  assign,  or  transfer  them  at  will. 
The  power  and  rights  of  the  stockholder  depend  upon  the  terms 
of  the  contract  recited  in  the  stock,  there  being  restrictions  and 
qualifications  of  rights  in  the  special  kinds  of  stocks  such  as 
preferred,  guaranteed,  etc.  The  specific  rights  of  common  and 
other  stockholders  will  be  gathered  from  what  has  been  said  in 
previous  departments  of  this  book.  When  a  stockholder's  rights 
are  infringed  he  may  sue  at  law  or  in  equity,  according  to  the 
facts  in  the  case. 

The  general  liabilities  of  stockholders  are  for  unpaid  sub- 
scriptions to  stock,  or  for  the  balance  on  partly  paid  stock* ;  for 
dividends  declared  from  the  capital  of  the  corporation;  and 
sometimes, -for  debts  due  to  employes.  Certain  contingencies 
govern  the  liabilities  of  stockholders  and  the  statutes  of  the 
state  under  which  the  corporation  is  organized  should  be  con- 
sulted to  determine  the  liabilities.  In  California  and  Minnesota 
there  are  liabilities  to  twice  the  par  value  of  the  stock,  the  same 
as  in  national  banks. 

The  exercise  of  corporate  powers  by  stockholders  is  through 

*  For  exceptions  to  the  rule  that  the  holders  of  shares  not  fully 
paid  are  liable  to  creditors  in  the  difference  between  the  amount 
paid  and  the  par  value  of  the  shares,  see  Van  Cott  vs.  Van  Brunt,  82 
N.  Y.  535,  where  the  payment  of  a  corporation  debt,  in  good  faith,  by 
the  issue  of  stock,  is  upheld;  Handley  vs.  Stutz,  139  U.  S.  417  (an  in- 
teresting and  significant  case),  where  is  upheld  the  right  to  issue 
stock  at  less  than  par  to  save  a  going  concern;  Christensen  vs.  Eno, 
106  N.  Y.  97,  where  a  person  to  whom  shares  have  been  issued  as  a 
gift  is  not  held  liable  to  creditors.  Cook  on  Corporations  says,  citing 
Handley  vs.  Stutz,  "And  it  is  now  established  law  that  an  embar- 
rassed corporation  may,  upon  an  increase  of  its  stock,  put  such 
stock  upon  the  market  and  sell  it  for  the  best  price  that  can  be  ob- 
tained, and  that  the  corporation  may  throw  in  as  a  bonus  a  certain 
amount  of  full-paid  stock  to  the  purchaser  of  its  bonds,  and  there 
will  be  no  liability  on  the  stock."  Great  care  should  be  taken  in  pur- 
suing a  course  of  this  kind  that  there  are  the  proper  constitutional 
or  statutory  conditions  precedent  to  such  action,  and  a  corporation 
lawyer  familiar  with  the  cases  on  this  subject  should  be  consulted 
to  approve  or  condemn  the  action. 


STOCKHOLDERS.  135 

the  determination  and  registering  of  the  will  of  the  majority  of 
the  stockholders.  "This  is  required  to  be  done  by  appropriate 
means  [vote  or  consent],  at  a  meeting  of  the  stockholders,  called 
with  prescribed  formalities,  and  attended  by  such  a  number  of 
them  as  the  charter  declares  to  be  a  quorum.  The  majority  may 
express  their  consent  that  a  specific  act  be  done,  or,  after  it  is 
done,  that  it  be  held  valid ;  or  that  consent  may  be  implied  from 
the  appointment  of  general  officers  or  agents,  within  the  scope 
of  whose  powers  and  duties  that  act  lies."* 

A  quorum  at  a  stockholders'  meeting  is  such  a  number  of  the 
shareholders  of  the  corporation  as  is  necessary  to  bring  together 
the  required  amount  of  voting  stock  to  transact  business.  Statutes, 
articles,  or  by-laws  usually  provide  that  the  holders  of  a  major- 
ity of  all  the  issued  shares  shall  constitute  a  quorum.  Then  by 
vote  of  a  majority  of  a  quorum,  the  corporate  transactions  are 
determined  and  the  corporation  is  bound.  The  common-law  rule 
is  that  those  of  the  stockholders  who  actually  assemble  after 
proper  notice  constitute  a  quorum  for  the  transaction  of  business, 
even  though  they  are  a  minority  of  the  whole  number  and  repre- 
sent only  a  minority  of  the  stock.  Statutes  reading  "a  majority 
of  the  stockholders"  mean  a  majority  in  interest  rather  than  in 
number.  It  takes  two  persons  to  constitute  a  "meeting";  one 
person  holding  a  majority  of  the  stock  cannot  hold  a  meeting  to 
which  other  stockholders  are  not  invited,  nor  bind  them  or  the 
corporation  by  his  informal  acts,  though  a  person  owning  all  the 
shares  may  bind  his  corporation  by  contracts  made  in  its  name. 

It  will  be  noted  that  stockholders,  in  their  capacity  of  stock- 
holders, have  little  to  do  with  the  active  business  affairs  of  the 
corporation.  The  basic  authority  is  theirs,  but  after  defining 
the  powers  of  directors  and  officers  and  delegating  authority  to 
them,  their  influence  and  control  are  somewhat  removed.  The 
importance,  then,  of  judiciously  selecting  directors,  officers,  and 
agents  and  of  defining  and  properly  limiting  their  powers  by 
by-law  is  apparent. 

*  Benjamin  Trapnell,  "The  Logical  Conception  of  a  Corporation," 
in  Clark  on  Corporations,  p.  643. 


136  MODERN   BUSINESS    CORPORATIONS. 

§  64.    Stockholders'  Meetings. 

Stockholders'  meetings  are  regular  or  special.  The  regular 
meeting  for  the  election  of  directors,  the  hearing  of  reports,  and 
the  transaction  of  any  proper  business  is  held  annually,  and  the 
time  and  place  of  meeting  are  usually  provided  by  by-law.  Gen- 
erally, such  meetings  must  be  held  in  the  state  in  which  the  .cor- 
poration was  created,  but  there  are  sometimes  statutory  provi- 
sions permitting  the  meetings  to  be  held  elsewhere.  In  all  cases, 
however,  the  first  meeting  of  stockholders  should  be  held  in  the 
state  of  the  corporation's  creation;  the  first  meeting  is  recog- 
nized as  being  held  for  the  purpose  of  doing  constituent  acts, 
electing  directors,  adopting  by-laws,  etc. 

Stockholders  are  entitled  in  law  to  due  notice  of  all  meetings, 
and,  in  case  the  number  of  days'  notice  is  not  provided  by  stat- 
ute, it  should  be  provided  in  the  articles  or  by-laws.  Special  no- 
tice of  the  kinds  of  business  to  be  transacted  at  a  regular  meet- 
ing is  not  necessary,  but  if  there  is  any  business  of  an  unusual 
nature,  any  proposed  radical  changes  of  corporate  or  business 
concern,  to  come  before  the  meeting,  mention  of  them  should  be 
made  in  the  notice.  Notices,  written  or  printed,  should  be  sent 
to  the  stockholders  ten  or  more  days  before  the  meeting,  and  in 
some  states  further  notice  is  required  by  publication.  The  circu- 
lar notice  should  be  sent  to  the  last-known  postoffice  address  of 
each  stockholder.  Notice  should  never  be  given  by  publication 
alone,  as  it  might'  be  made  the  least  sure  way  of  reaching  stock- 
holders. If  the  by-laws  provided  only  for  this  method  of  notifi- 
cation, publication  might  be  made  in  a  paper  of  limited  circula- 
tion, where  few  would  see  it,  and  a  body  of  stockholders,  enough 
to  constitute  a  quorum  or  to  satisfy  a  statutory  requirement, 
might  legally  pass  measures  which  would  otherwise  be  defeated. 
Notwithstanding  what  has  been  said  of  the  regular  officers  serving1 
at  stockholders'  meetings  the  fact  of  the  law  is  that  the  stockhold- 
ers have  the  right  to  elect  any  of  their  number  chairman  and  sec- 
retary of  their  meetings,  unless  otherwise  provided  by  statute,  ar- 
ticles or  by-laws.  When  the  question  of  specially  approving  or 
censuring  any  of  the  acts  of  directors  or  officers  is  to  come  up,  the 


STOCKHOLDERS.  137 

better  plan  is  to  elect  a  chairman  and  secretary  other  than  those  of 
the  officers  who  would  otherwise  serve.  It  is  customary  for  the 
president  to  call  the  meeting  to  order,  and  also  for  him  to  preside 
in  the  regular  course  of  business.  If  such  contingency  as  was 
mentioned  arises,  the  stockholders  may  elect  a  vice-chairman  to 
serve  during  the  consideration  of  such  questions  if  the  articles 
do  not  specify  that  the  president  or  vice-president  shall  preside. 
If  such  provision  is  made  by  by-law,  the  by-law  may  be  sus- 
pended. Where  no  provision  is  made  in  the  articles  or  by-laws 
as  to  who  shall  serve  as  chairman  and  secretary  of  stockholders' 
meetings,  such  positions  are  filled  by  election  at  each  meeting. 
And  if  those  are  absent  who  would,  according  to  provision,  fill 
the  positions,  then  the  stockholders  elect  a  temporary  chairman, 
or  vice-chairman,  and  a  temporary  secretary.  By-law  provision 
is  often  made  for  the  succession  of  presiding  officers,  viz.,  presi- 
dent, vice-president,  treasurer  and  vice-chairman.  The  secre- 
tary, if  present,  is  thus  left  to  perform  his  proper  duties. 

A  convenient  order  of  business  may  be  provided  by  by-law, 
but  it  should  be  made  directory  and  not  mandatory.  The  fol- 
lowing is  suggested  for  the  regular  annual  meeting :  (1 )  Select- 
tion  of  chairman  and  secretary;  (2)  proof  of  notice  of  meeting; 
(3)  calling  of  the  roll;  (4)  reading  and  disposal  of  previously 
Tinapproved  minutes;  (5)  reports  of  officers  and  committees; 
(6)  election  of  directors ;  (7)  unfinished  business ;  (8)  new  busi- 
ness; (9)  adjournment.  The  secretary  should  have  the  transfer 
book,  or  stock  record  book  at  the  stockholders'  meetings,  so  as  to 
be  able  to  determine  who  has  the  right  to  vote,  should  any  ques- 
tion occur.  The  right  belongs  to  stockholders  of  record,  and  the 
by-laws  should  so  specify.  Common  stockholders  will,  of  course, 
have  a  vote  for  each  share  of  stock,  and  preferred  shareholders 
will  have  the  same  right  unless  it  has  been  provided  that  the 
preferred  stock  shall  be  non-voting.  The  bondholders  may  be 
permitted  to  vote,  if  the  corporation  has  been  organized  under 
the  laws  of  Delaware  or  Nevada  and  provision  is  made  therefor. 
Voting  will  be  conducted  according  to  the  by-laws  or  rules  of 
order  adopted.  The  election  of  directors,  which  occurs  at  the 
regular  annual  meeting,  should  be  by  ballot.  In  the  larger  cor- 


138  MODERN   BUSINESS   CORPORATIONS. 

porations  two  or  three  inspectors  are  usually  appointed  by  the 
president  to  conduct  the  election.  It  is  better  that  they  be  elected 
by  the  stockholders,  however.  In  some  states  they  are  required 
by  law.  They  take  oath  that  they  will  conduct  the  election  im- 
partially and  faithfully,  receive  and  count  ballots  and  make  a 
formal  signed  testimony,  with  personal  seal  affixed,  of  the  re- 
sults of  the  election.  If  desired,  the  inspectors'  certificate  or 
report  of  election  may  be  sworn  to  by  them  before  a  notary. 
The  secretary  will  have  charge  of  certificates  of  election,  and 
will  file  them  with  other  important  papers  of  the  corporation. 
In  some  states  cumulative  voting  is  permitted,  whereby  a  minor- 
ity of  stockholders  may  concentrate  their  votes  on  one  or  more 
directors  and  thus  secure  representation  on  the  board.  This  is 
about  the  only  protection  offered  minority  stockholders  under 
the  laws  of  any  state.  Cumulative  voting  permits  each  stock- 
holder to  multiply  the  number  of  shares  he  holds  by  the  num- 
ber of  directors  to  be  elected,  and  to  distribute  these  votes 
among  alt  of  the  several  directors  to  be  voted  for,  or  to  cast 
them  all  for  one  or  two  or  any  number  less  than  the  whole  num- 
ber to  be  voted  for.  When  a  shareholder  cannot  be  present  at  a 
meeting  he  has  the  right  to  be  represented  by  proxy;  that  is, 
he  delivers  to  an  agent  or  attorney  a  written,  signed,  and  wit- 
nessed power  of  attorney,  which  is  evidence  that  such  agent  or 
attorney  may  represent  the  shareholder  according  to  the  terms 
of  the  instrument.  In  order  to  better  insure  a  quorum  at  an 
important  meeting  blank  proxies  are  sometimes  included  in 
the  envelope  with  the  notice  of  the  meeting.  A  proxy  may  be 
revoked  at  any  time  by  the  maker,  and  where  they  are  not  limited 
by  statute  they  may  be  issued  to  cover  any  period  of  time  or 
any  particular  meetings.  Proxies  expire  with  their  time  limit 
or  with  the  adjournment  (sine  die)  of  the  meeting  for  which 
they  were  issued;  but  they  hold  over  for  an  adjourned  (post- 
poned) meeting,  when  given  for  the  meeting  of  which  it  is  a 
part.  Proxies  may  be  made  in  the  name  of  any  person  whom  the 
maker  desires  to  represent  him.  Proxies  are  frequently  signed 
and  witnessed  without  including  the  name  of  the  proxy  (the 
agent  or  attorney),  and  are  thus  sent  to  the  secretary  in  blank. 


STOCKHOLDERS.  139 

At  the  meeting  the  secretary  fills  in  the  name  of  any  person 
present.  This  insures  representation  by  a  proxy.  When  proxies 
attend  a  meeting  they  present  their  credentials  to  the  secretary 
and  vote  in  all  respects  as  original  shareholders. 

Special  meetings  of  stockholders  are  called  for  particular  and 
usually  pressing  purposes.  The  place,  time  and  all  the  purposes 
of  such  meetings  must  be  given  in  the  notice.  Notice  should  be 
given  a  reasonable  length  of  time  previous  to  the  meeting,  as  is 
specified  usually  in  the  by-laws,  and  no  meeting  can  legally  be 
held  without  such  proper  notice,  unless  all  the  stockholders  sign 
a  waiver  of  notice  or,  by  their  presence  and  participation  in  the 
meeting,  imply  such  a  waiver.  Provision  is  made  in  the  by-laws 
for  the  calling  of  special  meetings,  either  by  the  president,  the 
directors,  or  a  certain  fraction  of  the  stockholders.  The  "call" 
for  a  special  meeting  is  given  to  the  secretary,  who  notifies  the 
stockholders. 


PART  VII. 


CORPORATE  BOOKKEEPING,  AUDITING  AND  AC- 
COUNTING. 


141 


COEPORATE  BOOKKEEPING,  AUDITING  AND  ACCOUNT- 
ING. 

§  65.  Corporation  Bookkeeping,  Auditing  and  Accounting. 

66.  A  Corporation's  Books. 

67.  The  Minute  Book. 

68.  The  Stockholders'  Ledger. 

69.  The  Book  of  Stock  Certificates. 

70.  The  Transfer  Book. 

71.  The  Dividend  Book. 

72.  The  Subscription  Book. 

73.  The  Instalment  and  Instalment  Scrip  Books. 

74.  The  Corporation  Calendar. 

75.  Books  Required  By  Law. 

§  65.    CORPORATION  BOOKKEEPING,  AUDITING  AND 
ACCOUNTING. 

Connected  with  the  office  of  every  large  and  intricate  business 
there  are  clerks  and  bookkeepers,  and  usually  an  auditor  and 
accountant  in  one  person.  The  work  of  these  several  kinds  of 
employes  differs  greatly.  As  an  expert  government  accountant 
puts  it:  "While  it  is  true  they  all  deal  with  figures,  there  is  as 
much  difference  in  the  character  of  work  performed  by  one,  com- 
pared with  that  done  by  another,  as  there  is  between  the  light  of 
an  electric  lamp  and  that  of  a  candle.  The  accountant  is  the 
electric  light  of  the  world  where  figures  are  involved,  while  the 
clerk  for  the  time  being  must  content  himself  to  be  the  candle." 

The  clerk  is  usually  a  mere  scribe  or  copyist,  transcribing 
into  books  whatever  is  given  him  to  copy  therein,  frequently 
knowing  little  or  nothing  of  the  relevancy  of  the  entries  he 
makes.  His  work  of  recording  transactions  is  largely  automatic, 
and  he  needs  no  special  knowledge  of  bookkeeping  to  fit  him 
for  his  work.  His  qualifications  are  accuracy  in  transcribing 
and  a  clear,  distinct,  legible  handwriting. 

143 


144  MODERN   BUSINESS   CORPORATIONS. 

The  bookkeeper  is  one  of  the  most  important  employes  of  any 
business  corporation.  Upon  him  the  directors  and  business  man- 
ager rely  for  information  as  to  the  financial  status  of  the  cor- 
poration and  data  as  to  the  business  done.  A  competent  book- 
keeper for  a  large  corporation  must  have  knowledge  and  ex- 
perience beyond  the  affairs  of  ordinary  business.  A  mere  gradu- 
ate of  a  "business  college,"  who  is  without  experience  and  busi- 
ness insight,  will  not  do.  It  requires  more  ability  and  knowledge 
to  be  a  bookkeeper  than  to  be  a  clerk,  a  fact  many  business  men 
have  learned  after  sustaining  financial  losses  that  were  caused 
by  wrong  bookkeeping.  The  first  qualifications  of  a  competent 
bookkeeper  are  a  thorough  knowledge  of  double  entry  book- 
keeping and  of  the  business  whose  transactions  he  is  recording 
on  the  books.  Whatever  additional  knowledge  he  may  have  of 
business  and  financial  practices,  the  better  fitted  he  will  be  for 
his  position. 

A  step  in  advance  of  the  bookkeeper  is  the  auditor.  There 
should  be  no  real  difference  in  the  qualifications  of  a  competent 
bookkeeper  and  an  auditor,  and  their  functions  differ  only  from 
the  standpoint  from  which  they  are  performed.  As  a  rule, 
auditors  are  more  advanced  in  bookkeeping  methods  and  in 
knowledge  of  business  and  financial  law  and  practices  than  ordi- 
nary bookkeepers.  They  are  really  advanced  bookkeepers.  But 
whereas  the  bookkeeper's  business  is  to  keep  a  daily  routine  ac- 
count of  the  business  done,  a  statistical  account  of  the  corpora- 
tion's transactions,  the  auditor's  work  is  to  review  the  work  of 
the  bookkeeper,  to  inspect  it  to  see  that  it  is  correct.  The  auditor 
examines  the  books  and  accounts  to  discern  their  correctness; 
compares  charges  with  vouchers;  examines  parties  and  wit- 
nesses; allows  or  rejects  charges;  states  whether  expenditures 
made  for  conducting  business,  for  additions  to  the  plant,  etc., 
have  been  charged  to  the  proper  accounts;  and,  in  reporting, 
states  how  nearly  the  books  correspond  with  the  facts.  His 
presentation  of  the  facts  will  constitute  a  verification  of  the 
bookkeeper's  statement,  or  will  be  a  revision  of  it.  The  courts 
frequently  refer  to  auditors  for  adjustment  of  accounts  involved 


BOOKKEEPING,   AUDITING   AND   ACCOUNTING.  145 

in  litigation,  and,  in  some  jurisdictions,  their  reports  are  final 
as  to  facts  unless  vitiated  by  fraud  or  gross  error.  In  large  and 
intricate  businesses  where  there  are  a  number  of  bookkeepers,  or 
departments  between  which  pass  funds  or  materials  and  vouchers 
therefor,  an  auditor  is  usually  employed  to  keep  straight  and 
verify  the  work  of  bookkeepers  and  department  heads.  When  a 
business  is  so  small  or  simple  that  it  is  not  worth  while  to  keep 
an  auditor  constantly  employed,  and  where  an  occasional  audit 
is  desirable,  an  auditor  from  an  audit  company,  which  has  com- 
petent men  for  this  very  purpose,  may  be  employed  periodically, 
say  once  in  six  months  or  a  year,  to  go  over  the  books  and  ac- 
counts of  the  company. 

The  accountant  is  a  degree  higher  than  the  auditor  and  must 
possess  all  the  qualifications  that  the  auditor  possesses,  and  he 
must  know  also  the  general  principles  of  commerce  and  finance 
and  the  detailed  conduct  of  the  businesses  with  which  he  is  en- 
gaged and  their  relation  to  other  businesses.  His  work  covers  a 
broad  and  diversified  field,  and  no  business  or  financial  knowl- 
edge he  possesses  will  be  superfluous.  His  work  differs  from  that 
of  the  auditor  as  does  the  work  of  a  surgeon  from  that  of  a 
physician.  His  characteristic  work  is  dissection,  analysis,  while 
the  distinctive  employment  of  the  auditor  is  inspection  and  clas- 
sification. An  accountant  may  go  considerably  beyond  the  gen- 
eral books  of  a  company.  Beyond  the  statistical  books  of  the 
company's  transactions,  which  are  kept  by  the  bookkeeper,  he 
prepares  books  statistical  of  business  facts  which  are  valuable 
and  necessary  to  be  known.  He  estimates  the  cost  of  production 
to  the  minutest  detail,  and  figures  all  the  sources  of  profit  and 
loss,  discovering  leaks  the  books  do  not  show,  and  suggesting 
improvement  in  conduct  of  business.  His  work  meets  that  of  the 
general  manager.  He  is  the  head  bookkeeper  and  auditor  and  the 
business  statistician  upon  whom  the  manager  relies  for  much  of 
his  assistance.  He  is  a  discoverer  of  business  facts  and  the 
ultimate  judge  of  the  significance  of  business  facts.  Expert  ac- 
countants have  been  frequently  employed  as  business  managers, 
and,  when  the  managing  heads  of  large  corporations  die,  the 
MOD.  Bus.  CORP.— 10 


146  MODERN"   BUSINESS    CORPORATIONS. 

accountants  often  succeed  to  those  positions,  as,  in  the  larger 
companies,  often  do  also  the  corporation  counsels. 

In  most  corporations  the  functions  of  auditor  and  accountant 
are  performed  by  one  person.  There  are  all  degrees  of  compe- 
tence among  auditors  and  accountants,  and,  before  employing 
either,  a  corporation  should  demand  that  the  person  it  employs 
shall  show  a  certificate  of  competency  from  a  reliable  univer- 
sity, college  or  school  of  audit  and  accounting  or  from  a  state 
which  gives  the  degree  of  C.  P.  A.  (certified  public  accountant) 
after  state  examination.  As  the  value  to  commercial  and  public 
interests  of  honest,  competent,  independent  auditing  and  ac- 
counting has  come  to  be  recognized,  a  few  of  the  states  have 
passed  laws  regulating  the  practice  of  the  profession  to  the  ex- 
tent of  enabling  competent  accountants  to  distinguish  themselves 
from  the  incompetent  ones.  New  York,  Illinois  and  some  other 
states  prohibit  an  accountant  from  using  the  title  C.  P.  A. 
unless  he  has  passed  an  examination  held  under  state  super- 
vision (under  the  supervision  of  the  state  universities  in  the 
states  mentioned).  The  examinations  cover  the  theory  of  ac- 
counts, practical  accounting,  auditing  and  commercial  law. 
There  are  usually  preliminary  requirements,  also,  as,  for  in- 
stance, in  New  York,  where  the  applicant  for  the  full  degree 
must  be  at  least  twenty-five  years  of  age,  of  good  moral  char- 
acter, and  must  have  had  sufficient  preparatory  education,  and 
three  years'  satisfactory  experience  in  the  practice  of  account- 
ing, one  of  which  was  in  the  office  of  an  expert  public  account- 
ant. Any  accountant  having  a  certificate  from  a  state  having 
such  laws  is  likely  to  be  competent  to  undertake  any  work  in 
his  line,  but  the  accountants'  acts  generally  have  an  exemption 
clause.  This  clause  permits  accountants  who  have  been  practic- 
ing in  the  respective  states  on  their  own  account  for  more  than 
a  year  before  the  passage  of  the  act  to  have  the  degree  of  C.  P.  A. 
generally  without  examination.  So,  in  employing  a  C.  P.  A.  it 
may  be  worth  while  to  inquire  whether  he  received  his  degree  by 
examination  or  by  exemption,  and,  if  by  the  latter,  to  try  to 
determine  his  ability,  or  other  firms'  estimate  of  his  ability,  by 
asking  a  list  of  large  commercial  or  financial  concerns  whose 


BOOKKEEPING,   AUDITING   AND  ACCOUNTING.  147 

accounts  he  has  audited.  Any  of  these  concerns  may  be  called 
on  for  a  confidential  opinion  as  to  the  satisf actoriness  of  the  ac- 
countant's services.  If  an  accountant  is  ever  proved  to  be  guilty 
of  being  bribed  or  of  other  fraudulent  or  unprofessional  conduct, 
his  degree  of  C.  P.  A.  may  be  revoked.  All  the  states  should 
have  certified  public  accountants'  acts.  For  an  independent 
audit,  no  person  interested  in  the  corporation,  directly  or  indi- 
rectly, should  be  employed.  The  corporation  should  at  all  times 
beware  of  the  bookkeeper  out  of  a  job  who  is  professing  to  be 
an  expert  accountant.  It  should  also  beware  of  the  man  who 
"swells  up"  and  puts  bookkeepers  and  office  employes  out  of 
countenance  with  him.  Since  the  work  of  expert  accountancy 
has  some  detective  features,  it  is  usually  necessary  that  the  ac- 
countant be  amiable  and  that  he  acquire  confidential  relations 
with  those  whose  work  he  is  inspecting. 

To  prevent  collusion  between  the  manager  and  bookkeeper  for 
the  purpose  of  committing  a  fraud  on  the  corporation  a  board 
of  directors  often  will  employ  an  auditor.  Also,  the  auditor  is 
frequently  the  direct  representative  of  stockholders  who  want 
to  be  sure  their  corporation  is  conducted  accurately  and  hon- 
estly. Keister's  Corporation  Accounting  and  Auditing  says: 
"One  of  the  most  unpleasant  situations  in  which  an  auditor  can 
be  placed  is  when  he  is  compelled  to  notify  the  stockholders  that 
the  company  is  not  in  a  prosperous  condition,  and  that  the  books 
are  inaccurate,  etc.  Should  he  find  the  books  to  be  carelessly 
and  inaccurately  kept,  and  false  statements  prepared  for  the 
stockholders,  then  he  must  positively  refuse  to  give  his  certifi- 
cate [of  sound  condition].  Usually  an  auditor  has  very  little 
trouble  to  induce  the  directors  to  write  of?  a  sufficient  amount 
for  depreciation  when  the  company  is  prosperous,  but  when  a 
period  of  depression  in  trade  arrives  the  directors  will,  without 
any  intention  of  acting  dishonorably,  present  a  statement  show- 
ing a  profit  equal  to  those  of  former  years,  while  in  reality  it  is 
considerably  less.  If  the  directors  refuse  to  amend  the  account? 
*  *  *  the  auditor  should  prepare  for  the  stockholders  a  full  re- 
port of  the  accounts,  setting  forth  clearly  therein  the  points  at  is- 
sue between  the  directors  and  himself,  and  sign  the  accounts  sub- 


148  MODERN   BUSINESS    CORPORATIONS. 

ject  to  such,  report."  The  auditor  "should  not  allow  himself  to  be 
influenced  by  the  directors'  arguments,  when  he  is  confident  his 
ideas  would,  if  carried  out,  be  a  benefit  to  all  concerned.  Direc- 
tors are  usually  men  of  ability,  integrity  and  honor,  and  when 
such  is  the  case  an  auditor  will  find  his  duties  easy  and  pleasant 
to  perform.  Every  facility  will  be  afforded  him,  questions  will  be 
promptly  and  correctly  answered ;  he  will  have  ready  access  to  all 
books,  securities  and  documents ;  any  suggestions  he  may  offer  as 
to  systematizing  their  methods  of  account  will  be  adopted,  if 
proved  to  be  advantageous.  If  bookkeepers  or  directors  have 
neglected  their  duties,  performed  fraudulent  operations,  or  have 
purposely  prepared  false  statements  and  accounts  to  submit  to 
the  stockholders,  the  auditor  will  then  find  every  possible 
obstacle  thrown  in  his  way  to  prevent  his  discovering  and  expos- 
ing their  deceptions.  When  such  is  the  case,  the  auditor  has  a 
very  responsible,  difficult  and  unpleasant  task  before  him.  How- 
ever, he  should  not  allow  himself  to  be  nettled,  tired  out,  or  hur- 
ried into  certifying  accounts  until  he  has  required  all  questions 
to  be  answered,  and  each  doubtful  item  explained  to  his  entire 
satisfaction.  If  directors  or  bookkeepers  refuse  to  answer  or 
explain,  the  auditor,  if  he  be  firm,  would  refuse  to  give  his  cer- 
tificate, which  would  place  the  directors  or  bookkeepers  in  an 
embarrassing  position,  if  they  should  attempt  to  appear  before 
the  stockholders  without  it.  An  auditor  should  be  able  not  only 
to  audit  and  verify  the  books  and  accounts  of  a  company,  but 
also,  if  he  finds  the  books  are  carelessly  kept,  or  if  the  system 
upon  which  they  are  conducted  is  cumbersome  or  such  as  to 
require  unnecessary  labor  or  time,  he  should  be  able  to  suggest 
a  better  method,  the  adoption  of  which  will  probably  ensure 
greater  accuracy.  The  books  of  many  companies  are  very  loosely 
and  unsystematically  kept  by  low-grade,  careless  and  incompetent 
bookkeepers,  whereas  if  competent,  careful  help  were  to  be  em- 
ployed, a  great  deal  of  unnecessary  work  might  be  concentrated 
into  fewer  books,  or  perhaps  even  be  dispensed  with  altogether. 
The  directors  are  managers  of  the  company  in  behalf  of  the 
stockholders,  to  whom  they  are  responsible,  and  it  is  important 
that,  in  his  anxiety  to  do  his  duty  towards  the  stockholders, 


BOOKKEEPING,   AUDITING   AND   ACCOUNTING.  149 

the  auditor  should  be  careful  not  to  interfere  in  the  management 
of  the  company  by  insisting  on  the  adoption  of  any  of  his  propo- 
sitions as  to  the  system  of  bookkeeping  or  other  matters.  He 
should  endeavor  to  introduce  his  improvements  by  friendly, 
courteous  suggestions,  and  by  putting  them  forward  gradually/' 
"The  auditor,  before  entering  upon  the  duties  of  his  first  audit 
of  a  company's  accounts,  would  find  it  greatly  to  his  advantage 
to  secure  a  complete  list  of  all  the  books  kept,  both  financial  and 
statistical,  with  all  financial  statements,  balance  sheets,  vouchers, 
and  everything  connected  therewith.  He  should  also  obtain  a 
copy  of  the  original  prospectus  if  the  company  be  a  new  one,  also 
a  copy  of  the  charter,  articles  of  agreement  and  by-laws.  A 
careful  examination  of  these  books  and  documents,  together 
with  what  explanations  he  may  deem  advisable  to  ask  of  the 
officers  and  bookkeepers  regarding  the  nature  of  the  business 
and  the  system  of  conducting  their  accounts,  will  better  prepare 
him  to  proceed  with  his  audit. 

"To  enable  an  auditor  to  certify  to  the  accuracy  of  the  books 
and  accounts  examined,  and  to  make  an  audit  effectual,  he 
should  seek  to  detect  and  guard  against  errors  of  three  kinds, 
namely:  (1)  Errors  of  principle,  such  as  are  apt  to  be  made 
by  those  not  proficient  in  the  science  of  accounts;  (2)  errors  of 
omission,  those  items  which  have  accidentally  been  omitted 
either  on  the  debit  or  credit  side;  (3)  errors  of  fraud,  entries 
intentionally  made  to  defraud  and  embezzle.  The  professional 
accountant  and  auditor  is  the  servant  of  the  public,  and  just 
what  the  public  wants  he  will  be  willing  to  give.  If  a  complete 
audit  of  the  accounts  of  a  corporation  is  called  for,  then  the 
auditor  will  examine  critically  each  item  to  detect  all  errors. 
But  if  it  is  desired  only  to  know  what  the  earnings  of  the  com- 
pany have  been,  he  will  supply  merely  this  information.  When 
an  auditor  is  called  upon  to  make  a  special  examination  upon 
some  particular  point  it  is  not  reasonable  to  suppose  that  he 
will  examine  or  certify  to  anything  but  the  point  in  question." 

The  higher  work  of  auditing  and  accounting  (there  is  no 
hard  and  fast  line  between  the  two)  is  intimately  connected 
with  the  practices  of  corporate  finance.  Thomas  L.  Greene,  in 


150  MODERN   BUSINESS    CORPORATIONS. 

his  interesting  and  instructive  book  called  Corporation  Finance, 
writes  as  follows  on  corporation  accounting.  A  careful  study 
of  the  statement  analysis  contained  herein  will  be  especially 
beneficial.  (This  is  reprinted  here  by  special  permission  of  the 
publishers,  G.  P.  Putnams'  Sons,  New  York  and  London.) 

"Evolution  in  accounting  is  to  be  expected  the  same  as  in  the 
methods  of  conducting  business.  As  the  transactions  become 
numerous  and  increase  in  complexity,  a  corresponding  change 
in  the  style  of  keeping  the  books  is  demanded.  The  principles 
of  bookkeeping  are  simple,  and  the  various  kinds  of  entries  are 
easy  of  general  comprehension.  The  practical  difficulty  lies  in 
making  the  book  set  forth  the  real  facts,  for  it  is  in  judging 
of  the  true  meaning  of  those  facts  that  the  statistician's  art  con- 
sists, the  process  of  recording  the  figures,  once  the  facts  are 
agreed  upon,  being  comparatively  easy.  Moreover,  the  truth  is 
many-sided;  a  business  optimist  will  see  things  favorably  and 
make  up  his  figures  accordingly,  while  an  ultra-conservative 
merchant  will  seek  to  have  the  position  of  his  affairs  set  forth  in 
the  most  unfavorable  light.  There  is  the  more  excuse  for  optim- 
ism in  corporation  matters,  for  corporations  live  on,  and,  having 
more  extended  credit,  often  live  down  losses  which  would  wreck 
partnerships ;  thus  it  sometimes  happens  that  for  his  own  repu- 
tation's sake  and  because  of  that  good  credit,  the  manager  of 
a  large  corporation  will  give  to  his  statements  the  brightest 
colors  that  the  circumstances  permit.  For  these  reasons  criti- 
cisms upon  corporation  reports  are  so  often  unfavorable,  not 
because  of  malice  on  the  part  of  the  critic  so  much  as  of  abound- 
ing optimism  on  the  part  of  the  usual  corporation  manager.  The 
excuse  for  such  optimism  should  fairly  be  taken  into  account: 
that  there  is  no  hard-and-fast  line  between  fact  and  credit; 
that  many  a  railway  (for  illustration)  is  helped  over  a  bad  place 
by  its  credit,  and  helped  safely,  whereas  if  the  exact  truth  were 
known,  that  credit  might  be  destroyed  and  with  it  perhaps  the 
whole  capitalization.  A  little  unwilling  forbearance  on  the  part 
of  creditors  may  bring  everything  around  right  and  cause  no 
loss. 

"Every  corporation  must  adopt  such  forms  of  accounts  as 


BOOKKEEPING,   AUDITING   AND  ACCOUNTING.  151 

suit  its  particular  business.  They  should  embrace  such  a  number 
of  separate  books  as  will  enable  the  management  to  know  ex- 
actly what  is  being  done  in  every  department  and  in  every  de- 
tail and  at  what  cost.  The  collection  of  statistics  costs  money, 
but  modern  experience  is  showing  that  only  by  accurate  statis- 
tical knowledge  can  modern  business  be  successfully  carried  on. 
There  are  good  systems  containing  elaborate  provisions  for  as- 
certaining the  various  costs  in  manufacturing.  A  corporation 
should  be  more,  rather  than  less,  exact  than  a  firm.  The  sources 
of  profit  down  to  the  minutest  detail  should  be  carefully  in- 
quired into ;  in  no  other  way  can  the  manager  know  which  class 
of  work  to  encourage,  or  which  to  study  with  a  view  of  improving 
the  process  of  production. 

"In  large  companies  the  main  account  is  that  of  the  general 
balance-sheet,  in  which  are  regularly  stated  the  other  accounts, 
such  as  surplus  income,  or  profit  and  loss.  Thus  the  balance- 
sheet  reflects  merely  the  changes  in  the  general  condition  dur- 
ing the  year,  not  the  amount  of  profit.  This  table  or  statement 
is  the  one  upon  which  the  lender  of  money  or  the  investor  should 
bestow  his  careful  scrutiny,  because  on  the  interpretation  of 
the  items  depends  one's  judgment  as  to  the  solvency  of  the  com- 
pany. The  income  table  is  simply  an  account  of  earnings  and 
expenses  in  totals,  together  with  the  proper  deductions  from  the 
net  revenue  for  the  year.  Accompanying  the  income  account 
should  be  tables  explaining  in  full  detail  the  items  there  given 
in  gross.  There  may  be  a  difference  of  opinion  between  the  man- 
agement and  the  bond-  or  shareholders  as  to  the  proper  disposal 
of  certain  items  of  expenditure  made  during  the  year.  There 
may  be  a  legitimate  question  whether  such  items  are  properly 
chargeable  to  income  or  not ;  such  questions  are  not  only  theo- 
retical but  very  practical,  because  on  their  answer  often  depends 
whether  a  dividend  is  paid  or  not.  For  such  reasons  the  report 
which  every  corporation  ought  to  make  to  its  shareholders  and 
the  public  (if  the  public  holds  the  shares)  should  contain  state- 
ments in  sufficient  detail  of  every  transaction  during  the  year, 
whether  included  in  the  income  account  or  not,  in  order  that 


152  MODERN   BUSINESS   CORPORATIONS. 

every  one  may  form  his  own  judgment  on  the  wisdom  of  the 
management  and  the  safety  of  his  investment. 

"In  cases  where  the  charging  of  items  of  expenditure  to  the 
income  account  may  be  doubtful  policy,  or  where,  from  the 
nature  of  the  case,  it  is  difficult  to  decide  such  questions,  since 
the  answer  may  depend  upon  one's  opinions  as  to  the  business 
prospects  for  the  future,  the  profit  and  loss  account  may  be 
credited  annually  with  all  the  surplus  earnings  of  the  corpora- 
tion over  and  above  fixed  charges  and  dividends,  or  fixed  charges 
only,  leaving  dividends  for  the  profit  and  loss  table.  Against 
these  surpluses  may  be  charged  from  time  to  time  the  cost  of 
unproductive  improvements;  the  deficits  of  subsidiar}''  compa- 
nies, which  for  the  time  must  be  met  from  the  revenues  of  the 
owning  corporation;  sums  which  have  been  included  in  the 
earnings  of  previous  years  and  which  have  now  proved  uncol- 
lectible, and  in  general  all  items  which,  in  the  judgment  of  the 
management,  should  not  be  deducted  from  the  income  of  the 
year,  but  which  good  financiering  requires  should  be  treated 
in  the  accounts  in  some  way  as  debits,  even  if  temporarily,  in 
order  that  no  inflation  in  the  assets  may  occur.  Such  a  profit 
and  loss  account,  if  carefully  and  fully  kept,  will  prove  a  better 
test  of  the  earning  capacity  of  the  company  than  the  income 
account,  which  shows  the  profits  in  any  one  year,  for  the  reason 
that  the  former  table  gives  an  average  of  results  extending  over 
a  number  of  years. 

"One  of  the  perplexing  things  in  the  financial  management 
of  a  large  manufacturing  or  trading  company  is  the  treatment 
of  the  expenditures  for  the  care  of  the  plant.  A  depreciation 
account  in  some  shape  must  be  kept  by  every  company  or  firm  in 
business.  The  real  estate  may  decline  in  value,  and  in  any  case, 
in  any  progressing  concern,  money  will  be  required  to  be  spent 
each  year  to  adjust  the  buildings  more  perfectly  to  the  require- 
ments of  the  business,  and  yet  these  adjustments  may  not  add 
anything  to  the  salable  value  of  the  property,  and  should  not, 
therefore,  be  added  in  the  accounts  to  the  company's  investment 
in  real  estate.  In  like  manner  machinery  will  wear  out,  and  is 
always  subject  to  the  danger  of  new  inventions,  which  may  ren- 


BOOKKEEPING,   AUDITING 

der  the  old  machinery  practically  worthless.  It  is  not  easy  to  fore- 
see when  a  new  outfit  will  be  in  part  or  in  whole  required,  though 
experience  soon  places  a  limit  to  the  number  of  years  in  which  a 
given  set  of  machinery  may  be  useful.  The  proper  course  in 
these  cases  is  always  the  conservative  one.  The  corporation 
should  estimate  the  probabilities  of  depreciation  always  against 
itself,  and  set  aside  yearly  such  sums  from  its  profits  as  will 
suffice  to  renew  so  much  of  the  plant  as  may  be  expected  to  wear 
out  or  to  become  useless  in  a  given  time.  Unless  this  deprecia- 
tion fund  is  carefully  thought  out  and  its  separation  from  profits 
rigidly  insisted  upon  the  shareholders  of  the  corporation,  and 
perhaps  the  bondholders,  may  in  the  course  of  years  find  that 
their  securities  cover  a  property  of  little  or  no  business  value. 
If  certain  sums  are  not  set  aside  to  meet  this  depreciation,  and 
if  for  this  reason  dividends  are  paid  larger  than  would  otherwise 
be  the  case,  to  the  extent  to  which  this  is  carried  the  returns 
received  by  the  shareholders  are  not  dividends,  but  their  capital 
returned  to  them  in  piecemeal.  These  depreciation  sums  should 
be  real  and  not  merely  bookkeeping  liabilities  of  the  company  to 
itself. 

"Modern  corporation  accounting  requires  that  in  theory  a 
sharp  line  of  distinction  should  be  drawn  between  outlays  which 
may  be  considered  a  part  of  the  regular  working  expenses  and 
those  which  are  chargeable  to  an  increased  investment  in  the 
business.  In  theory  the  former  should  be  deducted  from  the 
gross  earnings  before  the  net  revenue  is  determined,  while  the 
latter  may  be  met  by  an  increased  issue  of  bonds  or  shares. 
There  is  no  doubt  of  the  correctness  of  this  principle  in  general, 
but  in  its  practical  application  it  is  subject  to  great  modification. 
English  shareholders  in  American  corporations  usually  insist 
upon  such  a  system  of  accounting  as  divides  the  expenditures 
strictly  according  to  this  rule;  and  such  indeed  is  the  general 
practice  in  Great  Britain.  By  charging  to  capital  every  item, 
small  and  large,  which  could  by  any  possibility  be  construed  to  be 
a  betterment,  the  British  railways  have  increased  their  capitali- 
zation until  they  are  dependent  for  a  continuance  of  interest 
payments  on  good  traffics  year  by  year.  Thus  far  no  harm  has 


154  MODERN    BUSINESS    CORPORATIONS. 

come  to  these  railways  from  this  policy,  because  the  fluctuations 
in  the  volume  of  their  traffics  have  been  comparatively  slight. 

"But  in  the  United  States  more  caution  must  be  observed 
in  this  matter.  From  the  very  nature  of  the  case,  business  of 
all  kinds  in  a  developing  country  must  be  more  subject  to 
changes  in  profitableness  than  in  older  countries.  The  very 
character  of  the  American  people,  energetic  and  progressive, 
makes  business  all  the  more  liable  to  such  fluctuations.  Bad 
years  follow  good  years  in  every  line  of  American  industry,  al- 
though differences  are  less  violent  in  those  trades  which  are  the 
longest  established  and  among  those  companies  which  have  been 
in  operation  long  enough  to  render  their  business  comparatively 
stable.  The  principle,  therefore,  of  charging  all  so-called  bet- 
terments to  capital  and  meeting  the  cost  from  the  sale  of  bonds 
or  shares,  requires  modification  according  to  the  circumstances 
of  each  particular  company.  The  more  fluctuating  the  volume 
of  business  lias  been  or  is  likely  to  be  the  more  important  is  it 
that  in  one  form  or  another  a  part  of  the  profits  in  prosperous 
years  should  be  withheld  from  the  shareholders  and  put  into  the 
property  or  set  aside  for  its  renewal.  To  those  who  wish  a  work- 
ing principle  to  distinguish  the  proper  items  to  be  charged  to 
capital  account  in  the  actual  management  of  American  corpora- 
tions, railway  and  other,  the  following  definition  is  suggested: 
.  No  additions  to  the  property,  either  to  the  real  estate  or  to  the 
machinery  (if  a  manufacturing  company),  should  be  considered 
betterments  and  charged  to  capital,  unless  they  increase  the  pro- 
ductivity or  earning  capacity  of  the  plant.  Under  this  rule  the 
purchase  of  additional  equipment  for  a  railway  would  be  an  ex- 
penditure which  could  conservatively  be  met  by  the  issue  of 
bonds  or  equipment  notes,  because  such  purchases  would  enable 
a  larger  volume  of  traffic  to  be  handled ;  on  the  other  hand,  the 
replacement  of  a  wooden  bridge  by  an  iron  one  would  not  be  a 
proper  charge  to  capital,  under  our  definition,  unless  it  was  one 
of  a  series  of  expenditures  deliberately  resolved  upon  in  order 
that  heavier  trains  could  be  run  and  a  larger  volume  of  traffic 
handled,  thus  increasing  the  revenues  of  the  company,  an  in- 
crease which  our  theory  demands  should  be  clearly  seen  to  be 


BOOKKEEPING,   AUDITING   AND  ACCOUNTING.  155 

possible  after  the  various  amounts  of  capital  set  aside  for  this 
purpose  had  been  spent.  The  same  rule  might  be  applied  to  cor- 
porations other  than  railways;  the  safe  course  is  to  charge 
against  revenues  (possibly  through  the  profit-and-loss  account) 
the  cost  of  all  additions  to  the  property  which  do  not  increase  the 
output  or  decrease  the  cost  of  production.  Yet  any  rule  or  any 
principle  in  so  delicate  a  matter  can  properly  be  applied  in  each 
case  only  after  a  careful  study  of  all  the  circumstances,  including 
the  business  of  past  years  and  the  prospect  for  the  future. 
With  railroad  laws  in  nearly  every  state  permitting  unrestricted 
building,  American  railroads  are  constantly  liable  to  attack  by 
competing  lines  projected  for  legitimate  or  speculative  pur- 
poses. In  England  companies  are  not  chartered  unless  a  public 
necessity  for  the  proposed  line  is  shown.  In  the  United  States 
the  only  safe  course  for  the  old  roads  is  to  make  themselves 
strong  by  using  a  part  of  their  earnings  for  betterments,  thus 
keeping  down  the  capital  accounts.  The  Pennsylvania  Railroad 
has  pursued  this  policy  for  forty  years,  having  in  that  time,  ac- 
cording to  its  reports,  paid  eighty  millions  of  dollars  for  better- 
ments out  of  profits.  The  foreign  shareholders  have  frequently 
complained  of  this  policy,  though  experience  has  shown  it  to  be 
an  essential  element  in  the  present  strength  of  that  company. 

"On  railways  the  working  officers  prefer  to  have  included  in 
the  operating  expenses  only  such  sums  as  may  rightly  be  grouped 
under  that  title.  This  is  a  proper  request  on  the  part  of  the 
superintendents,  because  they  naturally  wish  that  their  adminis- 
tration of  the  affairs  of  the  company  should  be  shown  to  be  con- 
servative and  careful.  There  is  another  reason  also  for  keeping 
operating  expenses  distinct,  in  that  it  enables  the  managers  to 
compare  the  same  items  of  expenses  year  by  year.  If  these  items 
are  varied  by  the  inclusion  or  exclusion  at  times  of  sums  whose 
proper  accountings  may  be  in  doubt,  the  comparison  of  costs 
from  year  to  year  is  vitiated  and  a  valuable  test  of  the  efficiency 
of  the  operating  officers  is  lost. 

"To  meet  this  requirement  certain  corporations  deduct  the 
costs  of  such  betterments  as  one  item  from  the  net  revenue  often 
in  the  income  statement.  The  objection  to  this  course  lies  in  the 


156  MODERN   BUSINESS   CORPORATIONS. 

fact  that  the  sums  thus  expended  are  lost  sight  of,  and  to  the 
extent  to  which  those  items  are  hidden,  the  real  amount  of 
money  spent  upon  the  plant  is  understated.  This  is  not  a 
mere  bookkeeping  objection.  The  railways  have  found  that  the 
real  cost  of  their  property  is  a  factor  in  dealing  with  legisla- 
tures. Laws  may  be  passed  in  order  to  reduce  freight  rates 
and  passenger  fares  to  a  point  which  shall  yield  the  companies  a 
return  'on  cost.'  The  same  point  may  arise  at  any  moment  with 
companies  other  than  railways.  Every  corporation  should  there- 
fore so  keep  its  accounts  as  to  show  the  amounts  expended  to  im- 
prove the  plant  year  after  year  from  earnings.  A  common  custom 
is  to  apply  the  annual  surplus  directly  to  the  construction 
charges  for  the  year,  bonds  being  issued  for  the  amount  of  the 
capital  account  after  thus  deducting  the  surplus.  That  custom 
practically  adds  the  surpluses  spent  for  betterments  to  the 
capitalization ;  yet  it  is  a  question  whether  it  would  not  be  bet- 
ter to  open  a  comprehensive  profit-and-loss  account,  in  which  the 
cost  of  betterments,  as  well  as  other  indirect  but  necessary  ex- 
penditures, could  be  included. 

"Corporations  small  in  capitalization,  but  public  in  their  na- 
ture and  in  their  stock  holdings,  often  conduct  businesses  which 
do  not  require  an  elaborate  system  of  accounting.  Such  com- 
panies are  often  managed  by  men  who  are  themselves  large 
owners  in  the  property  and  af  the  same  time  skilled  in  that  par- 
ticular trade.  Such  men,  for  their  own  use  or  for  that  of  the 
few  other  shareholders,  need  only  the  simplest  statements  of 
the  business.  It  is  customary  in  these  small  companies  to  unite 
the  general  balance-sheet  with  the  income  account,  and  in  their 
cases  this  custom  leaves  no  difficulty.  On  the  one  side  are  stated 
the  items  of  cost  of  property,  the  valuation  of  the  tools  and  ma- 
chinery, the  cash  in  the  bank,  perhaps  the  amount  of  interest 
charges  and  dividends  paid  during  the  year,  and  the  working  ex- 
penses. On  the  other  side  of  the  account,  the  revenues  of  the 
year,  the  bonded  debt  and  the  current  debt.  Such  simple  state- 
ments are  well  enough  for  those  who  understand  the  business 
thoroughly,  while  the  changes  in  the  items  from  year  to  year  al- 
low of  the  working  out  of  the  various  principles  which  have  just 


BOOKKEEPING,   AUDITING   AND  ACCOUNTING.  157 

been  discussed  but  about  which  no  such  sharp  distinction  need  be 
drawn,  as  in  the  case  of  large  manufacturing  companies.  The 
original  cost  of  the  property  can  be  written  off  from  time  to  time 
by  adding  to  the  cash  on  hand  a  yearly  sum  before  dividing 
profits ;  a  method  of  keeping  a  depreciation  account  which  meets 
the  peculiar  requirements  of  such  companies  as  have  only  a  lim- 
ited existence,  such,  for  instance,  as  those  which  operate  a  mine 
where  the  amount  of  coal  or  ore  can  be  estimated  within  reason- 
able limits.  This  sum  of  money  in  the  bank  is  then  applicable 
to  the  extinguishment  of  the  bonded  or  share  capital  at  the 
proper  time,  or  may  be  used  for  heavy  improvement  to  the  prop- 
erty if  such  should  be  decided  upon.  Small  corporations  which 
have  been  formed  for  family  reasons,  and  whose  shares  are  held 
by  the  former  partners  and  not  sold  to  the  public,  require  no 
special  discussion.  Their  affairs  are  managed  very  much  the 
same  as  under  the  former  partnership. 

"The  formation  and  increasing  numbers  of  corporations  whose 
shares  are  held  by  the  public,  and  whose  business  is  trading, 
have  led  to  a  more  rigid  system  of  estimating  mercantile  credits 
and  of  inspecting  the  items  upon  which  that  credit  is  based. 
The  evolution  of  corporation  (or  partnership)  credit  is  one 
which  must  work  for  the  good  of  all  concerned.  Such  companies 
yield  increasing  opportunities  for  the  investment  of  small  sums, 
and  while  thus  gathering  together  the  little  rivulets  of  capital 
their  managers  should  themselves  be  under  a  moral  responsibil- 
ity to  take  all  the  more  care  of  other  people's  money.  It  is  well, 
therefore,  that  the  affairs  of  trading  companies  should  be  sub- 
jected to  such  analysis  as  will  indicate  their  solvency.  Prepar- 
ing statements  that  will  stand  examination  is  one  of  the  best 
tests  to  which  corporation  managers  submit  as  tending  to  bring 
the  real  position  clearly  before  their  own  eyes  and  making  them 
conservative  in  conducting  the  business  and  in  estimating  profits 
for  the  shareholders.  Following  this  thought  further,  below  will 
be  found  the  statement  of  a  non-existing  trading  company, 
whose  assets  and  liabilities  may  be  commented  upon  without  re- 
serve. The  figures  chosen  for  the  purpose  are  intentionally 
doubtful  and  do  not,  of  course,  reflect  the  real  position  of  our 


158  MODERN   BUSINESS    CORPORATIONS. 

small  corporations.    They  have  been  corripiled  in  this  form  ar- 
bitrarily and  for  the  sake  of  comment. 

"The  Blank  Trading  Company,  we  will  suppose,  was  incorpo- 
rated for  the  purpose  of  importing  and  selling  fancy  goods. 
The  statement  below  is  assumed  to  have  been  made  December 
31  and  the  inventory  to  have  been  taken  on  the  same  day.  The 
head  office  is  in  New  York  City,  with  branches  in  Boston  and 
Chicago.  The  president  of  the  company  is  interested  in  a  retail 
store  in  Chicago,  to  whom  the  company  sells  goods.  The  state- 
ment of  assets  and  liabilities  of  the  company  is  as  follows : 

THE  BLANK  TRADING  COMPANY. 

ASSETS. 

A.  Cash  on  hand $600 

B.  Cash  in  consolidated  and  other  banks 4,000 

C.  Bills  receivable  (due  from  customers) 7,000 

D.  Bills  receivable  (due  from  branches) 10,000 

E.  Accounts  receivable  (due  from  customers) . . .  63,000 

G.    Merchandise  (valued  at  cost) 170,000 

H.    Real   estate 27,000 

J.    Machinery  and  fixtures 800 

K.    Merchandise  in  bonded  warehouses 37,600 


Total $320,000 

LIABILITIES. 

P.    Capital  stock  (preferred) $50,000 

Capital  stock  (common) 50,000 

Q.    Bills  payable  for  merchandise 47,000 

R.    Bills  payable  to  banks 15,000 

S.    Bills  payable  for  commercial  notes  sold 10,000 

T.    Open  accounts 109,000 

V.    Deposits  of  employes 4,500 

X.    Profit  and  loss 34,000 


Total $320,000 


BOOKKEEPING,   AUDITING   AND  ACCOUNTING.  159 

"Some  additional  facts  are  assumed.  A  portion  of  the  mer- 
chandise in  warehouses  is  subject  to  'trust  receipts/  There  is 
a  contingent  liability  (not  shown  in  the  statement)  of  $20,000 
for  indorsed  bills  receivable  outstanding.  About  $12,000  of  ac- 
counts and  bills  receivable  is  acknowledged  to  be  past  due. 
Sales  the  preceding  year  amounted  to  $350,000.  Expenses  of 
conducting  the  business  were  $60,000,  and  dividends  of  8  per 
cent,  upon  preferred  and  12  per  cent,  upon  common  shares 
calling  for  $10,000,  were  paid  during  the  year. 

"First  as  to  the  items  of  the  statement.  Item  A,  cash  on  hand, 
needs  no  particular  comment.  It  represents  actual  money  in  the 
hands  of  the  company.  In  a  few  instances  where  deliber- 
ate fraud  was  intended  this  item  has  been  manipulated.  Some- 
times the  words  'and  cash  items'  have  been  added,  so  that  un- 
collectible bills  or  things  of  that  character  could,  by  a  stretch 
of  language,  be  included.  In  one  instance,  where  a  payment 
was  soon  to  be  made  to  creditors,  a  sum  of  money  was  bor- 
rowed from  the  bank  and  called  'on  hand/  though  the  bank 
by  understanding  did  not  allow  the  cash  to  go  from  its  posses- 
sion, retaining  it  at  interest  over  statement  day.  But  such  cases 
are  rare.  'Cash'  has  a  recognized  meaning  and  is  correctly  ac- 
counted for  by  the  vast  majority  of  companies  and  firms.  Item 
B,  cash  in  bank,  also  means  what  it  says,  being  funds  of  the  com- 
pany on  deposit  and  subject  to  check ;  as  our  company  is  a  repu- 
table one,  there  is  nothing  to  cause  doubt  as  to  these  items  of 
cash,  A  and  B. 

"Item  C,  customers'  bills  receivable,  is  a  small  one.  If  it  is 
necessary  to  examine  into  it  closely,  one  ought  to  know  some- 
thing about  the  customers  whose  bills  are  held  and  the  character 
of  the  obligation.  Business  methods  have  changed  in  recent 
years.  It  was  at  one  time  the  general  custom  to  settle  all  ac- 
counts by  giving  bills.  Now,  with  the  exception  of  a  few  trades, 
it  is  customary  to  keep  running  accounts,  so  that  the  jobber  does 
not  have  his  customers'  due  bills  as  evidences  of  money  owing 
to  him  as  much  as  formerly.  Of  course,  an  obligation  signed 
by  two  known  firms,  though  one  be  small,  is  better  than  single- 


160  MODERN   BUSINESS    CORPORATIONS. 

name  paper;  but  such  paper  is  no  longer  obtainable  in  quanti- 
ties.  In  the  present  case  the  item  is  considered  a  good  asset. 

"Item  D,  covering  bills  receivable  due  from  branches,  must 
be  thrown  out.  Since  the  branches  are  parts  of  the  main  house 
their  obligations  are  also  obligations  of  the  main  house,  and 
cannot  in  any  way  be  called  assets.  The  confusion  sometimes 
brought  into  the  matter  of  the  relations  between  parent  houses 
and  their  branches,  or  between  the  home  office  of  a  corporation 
and  its  subsidiary  offices,  is  cleared  up  when  we  remember  that 
for  the  general  purpose  of  estimating  upon  the  financial  value 
of  shares  and  bonds  the  branches  and  the  head  office  constitute 
but  one  concern.  If  juggling  with  figures  or  technical  book- 
keeping operations  is  indulged  in  it  is  usually  done  to  conceal 
annual  losses  or  depreciation  or  else  to  make  the  reported  con- 
dition seem  better  than  the  reality.  In  small  trading  companies 
the  matter  is  usually  more  simple.  Instances  have  been  known 
where  the  head  office,  ignoring  the  real  position  of  its  branches, 
has  asked  for  bills  payable  to  cover  only  the  bookkeeping  debts 
due  to  the  parent  company.  These  bills  in  the  names  of  the 
branch  were  indorsed  by  the  manager  and  discounted  at  the 
bank,  the  proceeds,  of  course,  making  a  surprisingly  excellent 
showing  in  the  annual  statement.  The  indorsed  bills  were  not 
included  among  the  liabilities,  because  not  considered  'direct' 
obligations.  Of  course,  the  exhibit  thus  made  was  not  a  correct 
statement  of  the  company's  real  condition.  Many  trading  firms 
and  corporations  habitually  exclude  from  their  public  announce- 
ment all  indirect  obligations  of  indorsement  on  the  ground  that 
they  become  a  proper  charge  only  when  not  paid  by  the  maker. 
This  is  true  so  far  as  the  sheet  itself  is  concerned,  but  the 
shareholder  or  bondholder  who  wishes  to  learn  all  the  facts 
should  know  by  a  separate  statement  how  large  these  indirect 
indorsed  obligations  are.  If  out  of  proportion,  it  then  becomes 
important  to  inquire  why  they  exist,  and  how  far  the  makers 
are  financially  responsible.  The  matter  of  indirect  debts,  which 
may  become  direct,  is  one  which  should  have  careful  considera- 
tion in  all  corporation  management.  A  manager  willing  to  take 
advantage  of  bookkeeping  technicalities  may  not  speak  of  con- 


BOOKKEEPING,   AUDITING   AND  ACCOUNTING.  161 

tracts  which  he  has  made  for  the  purchase  of  supplies  or  ma- 
chinery because  dated  ahead,  and  therefore  not  yet  direct  obli- 
gations ;  but  all  such  prospective  debts  must  be  known  if  a  clear 
view  of  the  future  is  desired.  The  Blank  Trading  Company  ac- 
knowledge that  they  have  a  contingent  liability  amounting  to 
$20,000. 

"Item  E,  accounts  of  customers,  is  a  most  important  one  in 
trading  company's  statement,  and  one  equally  hard  to  value. 
Book  accounts  and  merchandise  are  the  main  assets  of  firms  and 
corporations  doing  a  trading  business.  If,  upon  investigation, 
it  is  found  that  these  two  items  can  be  considered  really  good 
assets,  the  company  is  justified  in  expecting  credit.  The  first 
question  to  ask  concerning  accounts  receivable  is:  Are  they  in 
proportion  to  the  amount  of  business  done  and  not  in  excess  of 
the  proportion  of  the  same  item  among  other  houses  in  the  same 
trade?  In  some  trades  these  book  accounts  run  fairly  uniform 
throughout  the  year.  In  others  they  vary  so  as  to  show  large 
amounts  at  one  season  with  small  sums  at  another ;  in  the  latter 
case  one  may  judge  of  the  item  partly  by  the  date  of  the  state- 
ment. In  the  particular  line  of  trade  which  has  been  chosen  for 
our  illustration  the  amount  of  jiccounts  receivable  on  the  last  day 
of  the  calendar  year  ought  to  be  quite  small,  increasing  in 
amount  from  the  first  of  the  year  until  the  conditions  are  re- 
versed by  spring  or  early  summer.  Perhaps  10  per  cent,  of  the 
gross  aggregate  sales  would  be  a  fair  proportion  to  expect  for 
this  item  in  the  statement  under  our  assumed  conditions.  It 
will  be  noticed  that  this  item  is,  therefore,  about  twice  what  it 
ought  to  be.  This  fact  of  itself  furnishes  a  reason  for  further 
investigation.  It  is,  of  course,  possible  that  these  accounts  are 
all  good — possible,  but  not  probable.  One  might  inquire  how 
much  of  these  book  accounts  is  overdue  and  is  carried  along  by 
the  company.  If  the  proportion  of  overdue  accounts  in  this 
item  is  at  all  heavy,  it  is  an  indication  either  that  goods  have 
been  too  freely  sold  to  irresponsible  parties  on  credit,  or  else 
that  some  misfortune,  such  as  the  loss  of  a  staple  crop,  has 
fallen  upon  a  certain  section  of  the  community  in  which  a  large 
MOD.  Bus.  CORP.— 11 


162  MODERN   BUSINESS   CORPORATIONS. 

quantity  of  The  Blank  Company's  goods  have  been  sold,  a  pos- 
sibility always  to  be  borne  in  mind  when  inquiring  whether  the 
credit  risks  are  scattered  or  practically  confined  to  one  or  two 
sections  of  the  country;  to  be  sure  not  to  be  caught  by  any 
technical  differences  one  should  ask  how  many  of  these  accounts 
have  been  extended  when  due,  which,  of  course,  is  another  way 
of  carrying  them.  If  the  company  will  make  up  a  statement  of 
the  customers  who  are  indebted  one  may  obtain  their  rating 
from  a  mercantile  agency  and  see  what  the  proportion  is  between 
their  capital  as  thus  reported  and  the  obligations  in  question.  If 
a  large  part  of  these  obligations  figure  out  to  be  more  than  25 
per  cent,  of  the  capital  of  these  customers,  one  may  distrust  the 
value  of  their  accounts.  In  the  present  case  it  is  stated  that  the 
president  of  the  company  is  interested  in  a  retail  store  to  which 
the  company  sells  goods.  Technically  we  may  expect  that  the 
company  would  not  consider  the  account  of  this  retail  store  as 
overdue,  and  yet  it  is  possible  that  the  swelling  of  this  item  be- 
yond the  limits  customary  in  that  particular  line  of  trade  may 
be  owing  to  the  credits  granted  to  this  particular  store.  Perhaps 
it  is  found  that  suspicions  are  in  part  confirmed,  and  that  the 
excess  of  book  accounts  over  the  normal  amount  is  really  dead 
wood  carried  by  the  company.  One,  therefore,  in  his  estimate  of 
values,  may  put  down  this  item  at  about  $30,000. 

"Item  G,  merchandise.  It  is  so  easy  to  accumulate  old  and 
unsalable  merchandise  that  nothing  but  eternal  vigilance  can 
keep  a  firm  free  from  that  error.  It  is  very  difficult  for  the  or- 
dinary investigator  to  make  up  his  mind  regarding  this  item  in 
the  company's  statements;  so  much  depends  upon  the  business 
instinct  with  which  the  goods  are  selected  and  the  judgment 
with  which  the  future  of  the  particular  trade  is  forecasted. 
Another  matter  that  one  should  know  is,  on  what  basis  the  value 
of  the  goods  has  been  arrived  at.  In  our  table  it  is  stated  that  the 
merchandise  is  Valued  at  cost/  meaning  cost  to  The  Blank 
Trading  Company.  In  these  figures,  therefore,  is  included  the 
manufacturer's  profit,  which  again  is  affected  by  the  credit  oJ 
the  purchasing  company.  The  open  accounts  due  by  this  corpo- 
ration are  fairly  heavy,  and  one  may  reasonably  conclude  thai 


BOOKKEEPING,   AUDITING   AND  ACCOUNTING.  163 

the  merchandise  has  not  been  reduced  in  cost  by  any  discounts 
for  cash.  In  short,  it  is  proper  to  refuse  to  accept  this  item  at 
its  face  value  in  estimation  on  the  solvency  of  the  company. 

"In  judging  of  a  firm's  or  corporation's  solvency  the  charac- 
ter of  the  goods  dealt  in  must  always  be  borne  in  mind.  The 
difference  between  staple  and  fancy  goods  is  one  which  not  only 
distinguishes  one  trade  from  another,  but  is  an  important  dis- 
tinction many  times  to  be  drawn  between  a  certain  set  of  articles 
and  another  in  the  same  store.  Groceries  may  be  accepted  at 
almost  full  value  even  under  the  hammer,  while  silks  and  ribbons 
are  dependent  upon  the  caprices  of  fashion  from  one  season  to 
another.  In  like  manner  hardware  can  be  taken  at  a  close 
estimate  nearer  to  its  inventory  value  than  can  boots  and  shoes. 
Wool  is  a  more  stable  article  than  woolens ;  and  so  we  might  go 
through  the  list.  In  the  present  instance  it  is  proper  to  say 
that  fancy  goods  are  of  uncertain  value,  yet  one  may  assume  that 
The  Blank  Trading  Company  deals  in  the  more  stable  kinds. 
Nevertheless,  it  is  clear  that  one  cannot  assume  the  full  value 
for  the  stock  of  merchandise  in  question  if  sold  at  auction. 
Balancing  all  these  probabilities,  the  value  of  this  item  may  be 
fixed  at  $100,000. 

"The  proper  valuations  to  be  put  upon  book  accounts  and  mer- 
chandise in  cases  of  insolvency  are  constant  subjects  of  study 
among  those  whose  business  it  is  to  loan  money  to  firms  or  com- 
panies either  by  direct  discount  or  through  purchase  of  com- 
mercial paper.  Below  is  a  table  of  liquidating  values  for  five 
trades,  compiled  by  a  banker  [James  G.  Cannon]  of  experience : 

rp     r.  Accounts  receivable.        Merchandise. 

Percentage  good.       Percentage  good. 

Hardware    72 80 

Dry  Goods 67 70 

Boots  and  shoes 80 65 

Furniture    70 68 

Groceries  40 95 

"The  experience  of  different  bankers  and  of  different  trading 


164  MODERN   BUSINESS   CORPORATIONS. 

firms  and  companies  may  be  more  favorable  or  unfavorable  than 
this  table  indicates  regarding  the  realizable  value  of  book  ac- 
counts and  stocks  of  merchandise.  It  should,  therefore,  be  modi- 
fied in  accordance  with  the  business  reputation  of  the  men  in 
charge,  or  of  the  traders  in  the  particular  section  to  whom  the 
goods  have  been  sold  on  credit. 

"Item  H,  real  estate,  $27,000.  This  value  seems  a  little  high 
for  the  comparatively  small  amount  of  business  done,  and  should 
have  further  investigation.  Some  small  companies,  sometimes 
through  carelessness  rather  than  actual  error,  add  the  cost  of 
improvement  made  from  year  to  year  to  the  value  of  their  real 
estate  until  this  item  comes  to  stand  on  their  books  at  an  amount 
much  in  excess  of  its  actual  selling  worth.  In  the  present  in- 
stance, it  is  assumed  that  this  has  been  the  practice,  and  the 
actual  value  of  the  property  by  appraisal  is  $15,000. 

"Item  J,  machinery  and  fixtures,  is  a  small  one  in  any  case 
and  need  not  be  commented  upon.  If  it  were  an  important  item, 
one  should  inquire  as  to  the  depreciation. 

"Item  K,  merchandise  in  bonded  warehouses,  $37,600,  is  sub- 
ject to  the  same  criticism  as  regards  its  real  value  as  that  al- 
ready passed  upon  the  merchandise  in  stock ;  that  is,  for  the  pur- 
pose of  questioning  the  solvency  of  the  company  or  of  putting 
a  value  upon  its  preferred  or  common  shares,  if  the  figures  named 
in  the  statement  are  too  high.  In  addition  to  this,  it  is  noted 
in  the  business  statement  that  a  part  of  this  bonded  merchandise 
is  subject  to  trust  receipts. 

"It  is  common  practice  for  firms  doing  an  importing  business 
to  have  the  foreign  goods  consigned  to  a  New  York  City  bank- 
ing house,  upon  whom  also  the  foreign  bills  are  drawn  payabL 
in  a  certain  number  of  days,  varying  according  to  the  custom: 
of  the  different  countries.  It  frequently  happens  that  thes< 
goods  reach  their  destination  before  the  bills  drawn  against  then 
are  due.  In  order  that  the  merchandise  may  be  sold  by  the  im 
porting  firm  soon  after  arrival,  an  arrangement  to  this  effect  i 
made  through  trust  receipts.  One  form  of  such  receipts  give 
the  importing  house  possession  of  the  goods,  but  without  title 
the  house  or  corporation  guaranteeing  to  hand  the  proceeds  o 


BOOKKEEPING,  AUDITING  AND  ACCOUNTING.       165 

the  sale  over  to  the  banking  house.  Another  form  permits  the 
putting  of  the  goods  in  store  under  warehouse  receipts.  These 
forms  are  varied  according  to  the  circumstances  of  the  case  and 
the  credit  standing  of  the  importing  company ;  but  in  whatever 
way  the  business  is  transacted,  the  meaning  is  that  the  merchan- 
dise affected  is  not  the  property  of  the  importing  house,  and 
cannot,  therefore,  be  included  in  its  list  of  assets.  In  the  pres- 
ent case,  something  must  be  deducted  from  the  face  value  on 
this  account  also.  It  will  be  dealing  generously  with  this  item 
if  it  is  put  down  at  $20,000. 

"By  adding  up  the  assets  as  revalued,  we  find  the  total  to  be 
$177,400.  A  glance  at  the  table  of  liabilities  shows  a  total  of 
$320,000.  If  from  this  one  deducts  for  his  own  purpose  capital 
stock  and  the  profit  and  loss — the  latter  item  being  simply  to 
balance  accounts — he  finds  the  actual  debts  for  money  to  amount 
to  $185,000,  or  about  $8,000  more  than  the  assets  as  valued  in 
our  examination.  This  means,  in  effect,  that  if  the  company 
should  be  wound  up,  the  holders  of  both  preferred  and  common 
stock  would  lose  their  whole  investment  and  very  likely  some  of 
the  creditors  also  would  not  be  paid  in  full.  Although  accord- 
ing to  the  statements  this  trading  company  paid  dividends  last 
year  amounting  to  eight  per  cent,  upon  the  preferred  and  twelve 
per  cent,  upon  the  common  shares,  yet  it  is  clear  that  no  divi- 
dends ought  to  have  been  distributed  until  a  fund  had  been  ac- 
cumulated which  would  balance  the  possible  bad  debts  and  de- 
preciation of  merchandise  of  which  we  have  spoken.  The  sales 
are  stated  to  have  amounted  the  preceding  year  to  $350,000. 
This,  it  will  be  noted,  is  only  three  and  one-half  times  the  capi- 
tal. There  has  been  some  gross  mismanagement  of  the  business 
because  modern  conditions  demand  that  the  capital  should  be 
turned  over  many  more  times  than  this  during  the  year.  This 
impression  is  confirmed  when  we  look  at  the  amount  of  business 
expenses,  $60,000.  Taking  the  expenses  and  dividends  together, 
it  will  be  noticed  that  it  required  twenty  per  cent,  profits  on  the 
small  amount  of  sales  to  meet  them.  Few  business  houses  in 
these  days  of  sharp  competition  can  be  assured  of  the  continu- 
ance of  so  large  an  average  gross  profit  as  that  at  wholesale. 


166  MODERN    BUSINESS    CORPORATIONS. 

There  is  clearly  something  the  matter  with  the  affairs  of  the 
company.  It  is  possible  that  some  of  the  excess  in  accounts  re- 
ceivable already  spoken  of  represents  bad  debts  contracted  by 
the  company  in  order  to  cover  so  large  an  amount  of  business 
expenses.  To  secure  so  large  a  percentage  of  profit  they  have 
been  willing  to  sell  goods  to  retail  houses  with  indifferent  credit. 
If  these  bad  debts  had  been  charged  off  there  would  have  been 
no  dividends  and  it  might  have  been  found  that  expenses  had 
not  been  earned. 

"Although  the  valuation  put  on  the  assets  shows  that  at  forced 
sale  they  would  only  realize  enough  to  pay  the  creditors,  it  does 
not  follow  that  the  affairs  of  the  company  cannot  be  retrieved. 
There  is  a  foundation  here  for  better  business.  If  energy  and 
ability  can  be  secured,  in  the  management,  the  amount  of  sales 
can  be  doubled  and  expenses  reduced  so  as  to  show  a  great  change 
in  the  proportion  to  the  volume  of  trade.  If  for  a  while  the 
profits  thus  realized  could  be  applied  to  the  reduction  of  the 
uncertain  items  among  the  assets,  it  is  possible  that  in  a  few 
years  the  aspect  of  things  could  be  so  completely  changed  as  to 
show  that  the  company  was  again  in  a  sound  condition. 

"Complete  change  in  the  modern  methods  of  supplying  mer- 
cantile credits  makes  it  necessary  for  the  lender  of  money, 
whether  on  commercial  paper  or  in  the  form  of  bonds  or  of  pre- 
ferred shares,  to  rely  upon  the  general  solvency  of  the  firm  or 
corporation.  This  of  itself  makes  needful  a  more  or  less  thor- 
ough investigation  into  the  whole  affairs  of  the  borrowing 
houses.  Very  likely  in  this  matter  as  in  other  lines  of  business 
there  will  arise  banks  and  banking  houses  which  will  make  a 
specialty  of  such  loans. 

"The  same  set  of  facts  puts  a  new  responsibility  upon  the 
firms  and  companies  which  ask  for  credit.  These  requests  for 
loans  involve  two  things:  first,  that  the  borrowers  are  honest 
and  mean  to  pay — which,  in  the  majority  of  cases,  is  taken  for 
granted, — and  second,  that  there  is  a  reasonable  hope  of  their 
ability  to  pay.  This  latter  point  does  not  concern  the  honesty  of 
the  managers,  but  depends  for  its  answer  upon  a  wide  estimate 
of  business  facts.  It  is,  therefore,  no  reflection  upon  a  borrowing 


BOOKKEEPING,   AUDITING   AND   ACCOUNTING.  167 

firm  or  company  to  have  the  investor  or  lender  ask  for  such  a 
statement  of  their  affairs  as  shall  enable  him  to  form  a  business 
judgment  upon  their  condition.  The  asking  for  investment 
money  on  mercantile  loans  from  the  banker  or  investor  implies, 
therefore,  that  such  a  statement  shall  be  forthcoming. 

"The  habit  of  making  such  statement  for  more  or  less  public 
examination  will  cause  the  managers  to  give  even  closer  atten- 
tion to  the  meaning  of  various  items  which  they  are  carrying 
upon  their  books.  In  this  way  conservatism  is  increased  by  the 
conditions  of  doing  business,  which  now  demand,  on  the  one 
side,  large  loans  of  capital,  and,  on  the  other,  business  ability 
and  honesty  without  sentimentalism." 

The  foregoing  quotations  from  expert  sources  are  given  to 
suggest  the  scope  and  the  importance  to  corporations  of  the 
professional  services  of  auditors  and  accountants.  Honest  and 
competent  officers,  directors,  and  bookkeepers,  or  other  employes 
whose  work  is  subject  to  inspection  and  supervision,  should  not 
think  they  are  under  suspicion  by  the  body  represented  by  an 
auditor,  but  should  be  glad  of  the  opportunity  to  have  their 
work  examined  and  approved  by  one  occupying  an  independent 
and  disinterested  position.  Often  an  accountant  will  recommend 
to  the  stockholders  changes  in  the  business  that  the  directors 
have  sought  in  vain,  such,  for  instance,  as  an  increase  in  capital 
stock;  or  he  will  agree  with  the  bookkeeper  that  the  system  of 
bookkeeping  in  use  may  be  greatly  improved  or  that  it  should  be 
discarded  entirely  and  will  make  the  suggestion  to  the  directors 
and  perhaps  secure  the  betterment.  The  accountant  or  auditor 
should,  of  course,  be  independent  of  all  personal  influences,  a 
man  of  established  character  and  firm  will.  It  is  almost  needless 
to  say  that  the  same  qualities  should  belong  to  a  bookkeeper. 

§  66.    A  CORPORATION'S  BOOKS. 

The  general  account  books  of  a  corporation  are  the  journal, 
cash  book,  sales  book,  and  ledger,  which  are  the  books  used  by 
individuals  and  partnership  companies  in  business.  There  may 
be  also  other  auxiliary  books  which  have  to  do  with  the  general 


168  MODERN   BUSINESS    CORPORATIONS. 

commercial  business  of  private  concerns  and  corporations.  All 
these  books  are  kept  under  the  supervision  of  the  treasurer  of  the 
corporation.  But  there  are  certain  books  required  in  a  corpora- 
tion that  are  not  used  by  individuals  and  firm  business.  These 
are  the  minute  book,  the  book  of  stock  certificates,  the  stock 
transfer  book,  the  stockholders'  ledger,  and  the  dividend  book. 
These  books,  with  the  exception  of  the  dividend  book,  which  is 
usually  kept  by  the  treasurer,  are  kept  by  the  secretary.  There 
may  also  be,  when  they  are  required  by  the  particular  circum- 
stances of  organization,  a  stock  subscription  book,  an  instalment 
book,  and  an  instalment  scrip  book. 

§  67.    The  Minute  Book. 

The  minute  book  is  a  record  of  the  proceedings  of  the  stock- 
holders and  the  board  of  directors  of  the  corporation.  Its  con- 
tents consist  of  the  dates  and  places  of  meeting,  the  names  of 
the  members  present,  the  business  transacted,  resolutions  passed, 
important  resolutions  discussed  and  defeated  by  vote,  etc.  Dis- 
cussions and  remarks  of  stockholders  or  directors  are  not  usually 
recorded  unless  they  throw  particular  light  on  an  important  cir- 
cumstance or  condition.  Important  correspondence,  contracts, 
reports,  etc.,  may  be  "spread"  upon  the  minutes ;  that  is,  copied 
into  the  minutes.  The  secretary  should  keep  on  file,  for  refer- 
ence, other  correspondence  and  documents  introduced  at  a  meet- 
ing. The  first  pages  should  contain  a  certified  copy  of  the  ar- 
ticles of  association  of  the  corporation,  or  a  transcription  of  the 
articles  made  by  the  secretary,  followed  by  the  by-laws,  recorded 
by  the  same  hand.  The  secretary  should  then  certify  that  the 
foregoing  by-laws  are  a  true  and  accurate  copy  of  those  adopted 
by  the  stockholders  or  directors  at  a  certain  meeting  specified 
as  to  time  and  place.  Several  blank  pages  should  be  left  for  en- 
tering amendments,  and  then  should  follow  the  minutes  of  the 
first  stockholders'  meeting.  The  minutes  of  stockholders'  and 
directors'  meetings  may  then  be  entered  as  they  occur,  care  be- 
ing taken  to  distinguish  them  by  the  headings  "Meeting  of  the 
Stockholders,"  "Meeting  of  the  Directors,"  with  time  and  place. 


BOOKKEEPING,   AUDITING   AND  ACCOUNTING.  169 

There  should  be  but  little  or  no  space  left  between  the  minutes 
of  the  various  meetings,  and  then  no  false  minutes  can  be  en- 
tered without  detection.  When  necessary,  additions  to  minutes 
may  be  made  on  the  page  margin.  Cross  lines  in  ink  may  be 
made  over  the  space  left  at  the  bottom  of  a  page  in  order  to  pre- 
vent false  entries.  Minutes  recorded  with  pen  and  ink  in  a 
bound  book  are  legally  the  most  satisfactory.  Loose-leaf  minute 
books  may  easily  have  substitutions  made  in  them  so  that  their 
value  as  authentic  records  is  more  often  open  to  question.  Every 
page  of  a  loose-leaf  minute  book  should  be  certified  to  by  the 
proper  officers,  and  not  just  the  minutes  as  a  whole  on  the  last 
sheet.  Sometimes  separate  minute  books  are  kept  for  stockhold- 
ers' and  directors'  meetings,  but  usually  only  in  large  corpora- 
tions. The  minutes  should  always  be  signed  by  the  presiding  of- 
ficer and  the  secretary  in  order  to  establish  their  authenticity. 
The  minute  book  is  kept  by  the  secretary  of  the  corporation,  and 
should  remain  in  his  possession.  Entries  should  be  made  by  no 
one  else.  A  properly-kept  minute  book  is  evidence  in  law  of  the 
acts  of  stockholders  and  directors  at  their  meetings.  Therefore 
the  secretary  should  take  great  care  that  the  minutes  are  exact. 
They  should  be  written  into  the  minute  book  immediately  after 
the  meeting,  unless  sufficiently  elaborate  notes  have  been  taken 
of  the  proceedings.  Sometimes  the  presiding  officer  will  ask  that 
motions  and  resolutions  aside  from  routine  matters,  such  as  mo- 
tions to  accept,  adjourn,  etc.,  be  submitted  in  writing  by  those 
proposing  them ;  the  resulting  documents  are  turned  over  to  the 
secretary  and  form  part  of  his  notes,  preventing  mistakes  which 
might  otherwise  occur.  A  meeting  of  stockholders  or  directors 
expresses  its  will  by  motions  and  resolutions  which  are  intro- 
duced, discussed,  and  passed  or  rejected  according  to  the  rules 
of  order  adopted  by  the  deliberative  body  using  them.  It  is  often 
desirable  that  the  introducer  and  the  seconder  of  a  motion  or 
resolution  be  named  in  the  record  of  a  meeting,  but  the  ab- 
sence of  the  names  does  not  affect  the  authority  or  force  of 
the  action.  Actions  taken  by  motions  and  resolutions  are  direc- 
tory or  mandatory  according  to  their  nature  and  language,  and 
are  binding  on  officers  or  agents,  if  necessary  to  be  carried  out  by 


170  MODERN   BUSINESS    CORPORATIONS. 

them,  in  the  one  degree  or  the  other.  When  a  stockholder  or 
director  has  objections  to  an  action  of  the  body  to  which  he  be- 
longs, he  may  wish  to  have  his  objections  recorded  in 'the  min- 
utes. He  may  present  his  objections  orally  or  in  writing,  and 
the  presiding  officer  will  decide  whether  they  are  pertinent  and 
shall  be  recorded.  If  presented  in  writing,  that  fact  should  be 
noted  in  the  minutes  and  the  document  should  be  kept  on  file  if 
it  is  not  spread  upon  the  minutes.  If  the  objecting  member  files 
objections  to  an  action  and  does  not  afterward  acquiesce  in  it  or 
assist  in  giving  effect  to  it,  he  may  sometimes  avoid  liability  re- 
sulting from  the  action.  A  mere  vote  of  "No/'  with  subsequent 
acquiescence,  implied  or  actual,  will  not  relieve  him  from  liabil- 
ity. A  member's  subsequent  attitude  toward  an  action  should  al- 
ways correspond  with  his  objections  if  he  wishes  to  avoid  personal 
responsibility.  If  liability  is  likely  to  result  from  an  action  to 
which  he  objects,  he  may  demand  that  his  objection  be  recorded. 
The  minutes  of  meetings  are  read  by  the  secretary  and  are  ap- 
proved or  amended  at  the  next  subsequent  meeting  of  the  body 
whose  actions  they  record.  If  no  member  of  the  body  objects  to 
the  minutes,  usually  the  first  item  of  record  at  the  next  meeting 
after  the  time,  place,  and  members  present,  is  that  the  minutes 
of  the  last  meeting  were  read  and  approved.  If  there  is  a  correc- 
tion to  be  made,  the  formality  depends  upon  the  apparency  or 
importance  of  the  correction.  A  member  may  call  attention  to  a 
mistake  in  spelling  a  name,  in  a  date  or  some  other  obvious  mat- 
ter and  the  president  may,  without  formal  action,  direct  that 
the  change  be  made.  If  a  more  important  error  is  made,  es- 
pecially if  there  is  a  question  or  dispute  over  it,  a  motion  may  be 
necessary  to  accomplish  a  correction.  But  whether  the  matter  in 
question  was  an  error  or  not,  if  a  majority  of  those  present  at 
the  current  meeting  order  that  a  change  be  made  in  the  minutes 
of  the  previous  meeting  the  secretary  must  make  it.  The  min- 
utes of  the  current  meeting  should  report  the  corrections  or 
changes  ordered  in  the  previous  minutes  and  the  portions  of  the 
previous  minutes  changed  should  be  stricken  out  by  having  a  red 
line  drawn  through  them  and  the  matter  ordered  to  be  inserted 
should  be  copied  between  the  lines  in  red  ink.  A  marginal  refer- 


BOOKKEEPING,   AUDITING   AND  ACCOUNTING.  171 

ence  should  be  made  to  the  minutes  of  the  meeting  when  the 
changes  were  ordered.  Sometimes,  in  order  to  maintain  its  legal 
existence,  a  corporation  organized  under  the  laws  of  one  state,  but 
having  its  principal  office  in  another  state,  must  have  an  annual 
meeting  of  the  stockholders  in  the  domiciliary  state.  This  is  a 
provision  of  the  statutes  of  some  of  the  states.  In  a  case  of  this 
kind,  the  non-resident  corporation  is  usually  represented  in  the 
parent  state  by  a  few  of  the  officers  or  stockholders  or  a  resident 
director,  and  a  majority  of  the  stock  is  represented  by  proxies 
taken  or  sent  to  the  meeting.  The  minutes  of  the  meeting  are  pre- 
pared beforehand  by  the  secretary  and  are  sent  with  the  proxies. 
The  proceedings  and  actions  to  be  taken  have  been  decided  by  the 
majority  stockholders,  and  the  reasons  for  the  meeting  are  to 
comply  with  the  law  as  to  the  necessity  of  stockholders'  meetings 
at  given  intervals  or  to  legalize  the  acts  that  have  been  deter- 
mined on  previously  by  the  majority  stockholders.  The  regular 
officers,  or  officers  appointed  at  the  meeting,  have  charge  of  the 
proceedings,  the  minutes  are  read,  and  the  actions  they  recite 
are  formally  taken,  and  the  meeting  is  adjourned.  The  minutes 
are  then  returned  to  the  secretary,  if  he  was  not  present,  and  are 
recorded  by  him.  This  is  a  common  practice  in  contemporary 
corporation  management. 

§  68.     The  Stockholders'  Ledger. 

The  stockholders'  ledger  is  used  for  the  stock  accounts  of  the 
various  stockholders.  It  shows  the  number  of  shares  originally 
subscribed  for,  the  transfers  made,  and  the  balance  of  stock  held 
by  each  member  of  the  corporation.  Stock  is  posted  to  the  debit 
of  the  persons  to  whom  it  is  delivered,  and  the  accounts  are  cred- 
ited when  the  stock  is  subsequently  transferred  to  other  persons. 
It  may  and  should  comprehend,  where  the  law  does  not  necessi- 
tate their  being  kept  separately,  a  stock  register,  giving  the  names 
of  stockholders  arranged  alphabetically,  their  addresses,  and  such 
other  matter  as  is  necessary  or  desirable.  The  entries  in  the 
stockholders'  ledger  are  obtained  from  the  instalment  book, 
where  there  is  one,  and  from  the  transfer  book  or  stock  certifi- 


172  MODERN   BUSINESS    CORPORATIONS. 

cate  book,  either  of  which  "serves  as  a  journal  to  this  ledger,  as 
it  shows  the  names  of  parties  to  be  charged  and  those  to  be  cred- 
ited for  the  shares  sold  or  transferred."  The  fore  part  of  this 
ledger  should  contain  a  capital  stock  account,  and  all  instal- 
ments paid  or  full  stock  payments  made  should  be  debited  to 
capital  stock.  The  stockholders  are  credited  with  the  amounts 
paid,  so  that  the  two  accounts  should  balance  and  show  the  paid 
up  capital. 

§  69.    The  Book  of  Stock  Certificates. 

This  book  contains  the  blank  engraved  certificates  of  stock  and 
the  stubs  thereto  attached.  These  certificates  are  issued  to  the 
stockholders  when  the  full  amount  of  their  subscription  to  the 
capital  stock  has  been  paid.  If  there  is  an  instalment  scrip  book, 
the  certificate  is  exchanged  for  the  scrip  when  all  the  instalments 
have  been  paid.  The  certificate  book  should  contain  as  many 
certificates  as  it  is  thought  will  be  needed,  taking  into  consider- 
ation the  likelihood  of  several  transfers  of  stock.  In  "close"  cor- 
porations, a  corporation  in  which  the  stock  is  held  closely,  not 
transferred,  only  a  few  more  certificates  than  there  are  stock- 
holders will  be  necessary,  while  in  a  corporation  whose  stock  is 
actively  traded  in,  a  great  many"  certificates  will  be  needed.  The 
certificates  are  issued  serially  and  are  so  numbered.  The  stubs 
are  numbered  to  correspond  with  the  certificates,  and  contain 
such  information  as  the  number  of  shares  issued,  the  date  of  is- 
sue, to  whom  issued,, from  whom  transferred  (if  so),  and  re- 
ceipts for  the  certificates  to  be  signed  by  those  to  whom  shares 
are  issued.  Certificates  are  made  out,  seals  are  attached,  stubs 
are  filled  by  the  secretary,  and  the  certificates  are  signed,  as 
statute  or  by-laws  provide,  by  the  president  and  secretary  or  the 
president  and  treasurer.  If  the  engraved  certificates  are  not 
ready  for  distribution  when  the  company  is  organized,  receipts 
for  money  paid  are  given,  or  temporary  written  or  printed  cer- 
tificates are  issued  which  are  worded  as  the  permanent  certifi- 
cates are  to  be  worded.  These  receipts  or  certificates  are  ex- 
changeable for  the  permanent  ones.  Attached  to  them  are  slips 


BOOKKEEPING,  AUDITING  AND  ACCOUNTING.       173 

showing  the  circumstance  under  which  they  were  issued  and 
stating  that  they  are  to  be  exchanged.  Common  and  preferred 
stock  certificates  are  worded  differently  and  are  usually  bound 
separately,  especially  if  there  are  many  of  each.  They  should  al- 
ways be  numbered  separately.  When  a  stockholder  transfers  all 
or  any  part  of  his  stock,  the  certificate  must  be  returned  to  the 
secretary  of  the  corporation.  On  the  back  of  the  certificate  is  a 
blank  form  of  assignment  and  power  of  attorney  which  must 
have  been  properly  filled  and  signed  by  the  transferrer,  whose 
signature  must  be  witnessed  by  a  competent  witness.  The  secre- 
tary pastes  the  certificate  to  the  stub  from  which  it  was  detached, 
and  writes  or  stamps  across  the  face  of  the  certificate  "Cancelled 
*  *  *  (date) ."  He  also  notes  on  the  stub  to  whom  the  transfer 
was  made  and  issues  a  new  certificate  or  new  certificates  to  the 
person  or  persons  designated  as  transferee  or  transferees.  If  the 
owner  of  the  certificate  retain  part  of  the  shares,  a  new  certifi- 
cate is  issued  to  him  for  the  part  he  keeps.  In  this  case  there 
should  be  noted  on  the  old  stub  "Kenewed  by  No. "  insert- 
ing the  number  of  the  new  certificate,  and  on  the  stub  of  the  new 

certificate,  "For  No. ,  Cancelled,"  inserting  the  number  of 

the  old  certificate.  The  account  of  the  transferrer  should  then  be 
debited  on  the  stockholders'  ledger  for  the  shares  transferred. 
In  making  this  partial  transfer,  the  transferrer  will  probably 
bring  in  his  certificate  and  get  two  certificates  for  it,  one  for  the 
number  of  shares  to  be  transferred  in  the  name  of  the  transferee 
and  one  for  the  balance  of  his  own  shares  made  in  his  name.  If 
for  any  reason  the  sale  should  not  be  made,  the  transferrer  has  to 
get  the  transferee  of  the  shares  meant  to  be  sold  and  already 
transferred  to  reassign  them.  So  a  better  way,  where  there  is 
any  doubt  at  all  of  a  prospective  sale,  is  for  the  transferrer  to 
exchange  his  original  certificate  for  two  certificates  made  out 
to  himself  for  the  amounts  respectively  to  be  sold  and  to  be  re- 
tained, and,  if  the  sale  occurs,  simply  to  assign  the  certificate 
with  the  shares  sold,  leaving  the  new  owner  to  get  a  certificate  in 
his  own  name. 

Sometimes  shares  are  transferred  in  blank,  i.  e.,  the  transferee 
signs  and  has  his  signature  witnessed,  but  does  not  put  in  the 


174  MODERN   BUSINESS    CORPORATIONS. 

name  of  the  assignee.  The  secretary  of  a  corporation  has  nothing 
to  do  with  stock  so  assigned  till  some  holder  of  the  certificate 
wishes  to  perfect  his  title  by  inserting  his  own  name  and  send- 
ing the  certificate  to  the  secretary  in  order  to  become  a  stock- 
holder of  record.  If  the  secretary  has  any  doubts  as  to  the  va- 
lidity of  an  assignment  of  stock,  he  has  a  right  to  investigate  the 
transfer  by  communicating  with  the  former  owner  or  owners  be- 
fore making  the  transfer.  He  may  require  a  stranger  present- 
ing a  certificate  for  transfer  to  be  identified  and  he  may  demand 
proof  of  ownership  of  any  one  so  presenting  a  certificate.  If, 
finally,  after  investigation  there  be  any  doubt  of  ownership,  the 
secretary  may  refuse  to  make  the  transfer  till  authorized  by  the 
board  of  directors,  who,  in  turn,  if  there  are  several  claims  to 
ownership  of  a  certificate,  may  wait  till  the  contested  matters 
are  adjusted  by  the  parties  themselves  or  are  settled  by  the  courts. 
If  there  is  no  reasonable  doubt  as  to  ownership  and  as  to  the  cor- 
rectness of  the  transfer,  the  secretary  is  bound  to  make  a  trans- 
fer on  request. 

§  70.    The  Transfer  Book. 

Smaller  companies  do  not  always  have  transfer  books,  as  the 
assignment  on  the  back  of  a  certificate  is  legally  sufficient  to 
authorize  the  secretary  to  make  a  transfer  of  record  and  to  issue 
a  new  certificate  to  the  purchaser.  Some  states,  however,  require 
a  transfer  book  to  be  kept  by  a  corporation.  Every  large  corpora- 
tion whose  stock  is  active  should  have  a  by-law  which  requires 
that  shares  shall  be  transferable  only  by  entry  on  the  books  of  the 
corporation,  for  then  it  is  possible  for  the  corporation  officers 
and  directors  to  know  who  are  entitled  to  vote,  who  are  entitled 
to  receive  dividends,  and  who  are  liable  as  stockholders  to  the 
corporation  and  its  creditors.  The  transfer  book  kept  separate 
from  the  stock  ledger  and  certificate  book  is  a  great  convenience 
and  a  more  accurate  and  permanent  record  of  the  history  of 
stock  transfers.  In  instances  when  there  has  been  a  dispute  as  to 
which  book  is  primary  evidence  of  transfer,  it  has  been  held  that 
the  transfer  book  must  control  over  the  stock  certificate  book  and 
the  stock  ledger. 


BOOKKEEPING,   AUDITING   AND  ACCOUNTING.  175 

The  stock  transfer  book  is  merely  a  book  to  record  the  trans- 
fer of  stock  from  one  ownership  to  another,  with  the  number  of 
the  stock  certificate  taken  in  set  against  the  number  of  the  stock 
certificate  issued,  and  with  a  further  provision  for  the  name  of 
the  person  who  has  been  authorized  to  make  the  transfer,  if  the 
owner  himself  does  not  present  the  stock.  The  form  of  such  a 
book  would  be  two  columns  on  one  side,  with  the  number  of  the 
stock  certificate  taken  in  and  the  name  of  the  owner  delivering 
it,  and  two  columns  on  the  other  side  for  the  number  of  the  new 
stock  certificate  issued,  with  the  name  of  the  person  to  whom  the 
stock  is  issued,  with  yet  another  column  for  the  name  of  the 
person  who  made  the  transfer  as  an  agent  for  the  owner,  if  the 
owner  did  not  personally  present  the  stock.  One  line  is  used  for 
each  stock  certificate  either  received  or  delivered,  and  the  trans- 
action therefore  runs  across  the  page  as  a  complete  record  of  the 
stock  taken  in,  the  person  who  transferred  it,  the  person  to  whom 
it  was  transferred,  and  the  number  of  the  new  certificate.  There 
will  also  be  references  to  the  pages  of  the  stock  ledger  where  the 
stock  accounts  of  the  transferrer  and  transferee  are  recorded. 

There  are  various  kinds  of  transfer  books,  made  to  suit  various 
needs.  There  is  one  form  which  is  a  detached  assignment,  the 
same  form  of  assignment  as  is  printed  on  the  back  of  the  stock 
certificate,  except  that  the  power  of  attorney  is  omitted.  It  is 
merely  a  device  for  signing  an  assignment  when  the  stock  certifi- 
cate is  not  in  hand. 

Another  kind  of  transfer  book  consists  of  forms  of  assign- 
ment, bound  together  and  numbered,  which  are  filled  out  when 
a  stockholder  makes  a  transfer.  The  following  is  representative 
of  this  kind  of  form : 

Transfer  No Ledger  Folio   

For  value  received,  I  hereby  assign  and  transfer  to  Robert  Bell  all 
my  right,  title  and  interest  in  one  Hundred  shares  of  the  capital 
stock  of  The  McKay  Publishing  Company,  of  Indianapolis,  the  said 
stock  standing  in  my  name  on  the  books  of  said  company  and  rep- 
resented by  certificate  No ,  this  9th  day  of  February,  1906. 

JAMES  REED,  Witness.  SAMUEL  MINNICK. 

New  Certificate,  No 

Issued  to  Robert  Bell,  Ledger  Folio 


176  MODERN   BUSINESS    CORPORATIONS. 

When  such  transfer  is  made  by  an  agent,  his  power  of  attorney 
should  be  filed  away  by  the  secretary  of  the  company,  unless  the 
power  is  granted  on  the  cancelled  certificate,  which  is  sufficient. 

The  secretary  fills  in  the  blanks  Transfer  No.  ,  Ledger 

Folio  ,  New  Certificate  No.  ,  and  [Assignee's] 

Ledger  Folio . 

The  last  form  is  more  protective  of  the  transferrer  of  stock, 
for  a  stockholder  is  liable  to  the  creditors  of  his  corporation  until 
the  transfer  is  formally  recorded,  personally  or  by  attorney,  on 
the  corporation's  books.  This  form  gives  the  signature  of  the 
transferrer,  with  date  and  witness,  so  that  he  is  relieved  from  the 
risk  incident  to  delay  on  the  part  of  a  transferee  who  has  not 
surrendered  an  assigned  certificate. 

§  71.     The  Dividend  Book. 

The  dividend  book,  when  one  is  used,  is  usually  kept  by  the 
treasurer  of  a  corporation.  It  is  a  record  of  the  stockholders, 
with  the  number  of  shares  held  by  each  set  in  a  column  after  the 
name,  followed  by  a  column  in  which  is  given  the  amount  of  thb 
dividend.  After  this  comes  a  column  in  which  is  set  down  the 
date  of  payment,  and  last,  a  column  in  which  the  stockholder 
signs  his  name  in  receipt  for  the  dividend.  In  large  corpora- 
tions, where  there  are  many  scattered  stockholders,  payment  is 
made  by  voucher. 

§  72.    The  Subscription  Book. 

As  subscriptions  to  stock  are  a  contract  as  between  the  sub- 
scribers, and  are  binding  from  the  time  they  are  made,  a  sub- 
scription book  has  the  nature  of  a  contract  as  well  as  of  a  record. 
The  contract  does  not  go  into  effect,  of  course,  till  the  corpora- 
tion is  fully  organized  and  created.  Such  mutual  contracts  to 
become  stockholders  in  a  prospective  corporation  are  binding  at 
common  law,  but  they  are  not  binding  and  enforceable  until  the 
proposed  capital  stock  is  subscribed,  unless  there  is  a  special 
agreement  to  that  effect  in  the  subscription  contract.  Under  the 
statutes  of  most  of  the  states,  however,  corporations  are  not 


BOOKKEEPING,   AUDITING   AND  ACCOUNTING.  177 

bound  so  closely.  Some  part  of  the  capital  is  specified  as  a  mini- 
mum amount  with  which  the  corporation  may  begin  business, 
and  this  amount  is  named  in  the  charter.  As  soon  as  this  amount 
is  subscribed,  the  subscriptions  are  enforceable.  The  amount 
should  be  set  out  in  the  subscription  agreement  as  that  with 
which  the  corporation  will  begin  business.  The  subscription 
book  contains  the  names  and  addresses  of  the  subscribers  for 
stock,  and  the  number  of  shares  subscribed  by  each.  A  small 
book  serves  the  purpose  usually,  unless  the  corporation  is  very 
large  and  the  prospective  stockholders  are  many.  In  a  small  cor- 
poration a  single  sheet  of  paper  is  oftentimes  used,  or  small,  in- 
dividual subscription  blanks  are  printed.  These  blanks  are  some- 
times used  in  forming  large  corporations  and  the  subscription 
book  is  used  as  a  mere  record.  To  make  a  subscription  contract 
binding,  it  must  name  the  par  value  of  the  stock  subscribed. 
It  should  also  name  the  amount  of  capital  stock. 

The  following  form  may  be  used  as  a  page  contract  and  rec- 
ord, where  there  are  no  special  conditions  and  stipulations : 

CHICAGO,  ILL.,  September  12,  1904. 

We,  the  undersigned,  hereby  severally  subscribe  for  the  amount 
of  the  capital  stock  of  The  Gray  Manufacturing  Company  set  oppo- 
site our  respective  names,  and  agree  to  take  and  pay  for  the  stock 
at  its  par  value,  in  cash,  on  demand  of  the  treasurer  of  the  com- 
pany, at  the  office  of  the  Union  Trust  Company,  of  Chicago,  111.  The 
capital  stock  of  said  corporation  is  to  be  $100,000,  divided  into  1,000 
shares  of  $100  each,  par  value. 

(Provide  four  columns  to  follow  here.  In  the  first  is  set  down 
the  dates  of  subscription;  in  the  second,  the  signatures  of  the  sub- 
scribers; in  the  third,  the  number  of  shares  subscribed  by  each; 
in  the  fourth,  the  addresses.) 

We,  the  undersigned,  subscribe  our  names  in  witness  to  the  fore- 
going subscriptions  and  signatures,  in  the  city  of  Chicago,  state  of 
Illinois,  this  20th  day  of  September,  1904. 

JAMES  GRAY,  President. 
WALTEB  LORD,  Secretary. 

If  the  corporation  is  issuing  both  common  and  preferred  stock, 
the  agreement  should  recite  the  total  amount  of  capital  stock, 
MOD.  Bus.  CORP.— 12 


178  MODERN   BUSINESS    CORPORATIONS. 

the  number  of  shares,  how  much  of  it  is  common  and  how  much 
preferred,  and  the  par  value  of  the  shares.  Then  a  column  should 
be  placed  in  the  subscription  book,  after  the  column  in  which 
is  to  be  written  the  number  of  shares  subscribed,  to  denote 
whether  the  shares  subscribed  are  common  or  preferred.  Care 
should  be  taken  to  make  the  subscription  "we  subscribe,"  and 
not  "we  agree  to  subscribe,"  which  has  a  different  meaning. 

When  there  are  special  conditions  attaching  to  a  subscription, 
they  should  be  set  out  in  detail.  It  may  be  suggested  that  insert- 
ing unlawful  conditions  will  make  such  a  subscription  contract 
void.  When  a  prospectus  has  been  sent  with  subscription  blanks, 
it  has  been  considered  that  the  representations  made  in  it  must 
be  fulfilled  by  the  corporation  in  order  to  make  the  subscription 
hold. 

§  73.    Instalment  and  Instalment  Scrip  Books. 

Sometimes  stock  is  to  be  paid  for  at  given  times,  in  given  per 
cents,  till  the  payment  is  completed.  The  instalment  book  con- 
sists of  the  instalment  lists,  one  of  which  is  made  out  just  be- 
fore an  instalment  is  due.  These  lists,  each  of  which  is  headed 
by  the  number  of  the  instalment  and  the  per  cent.,  are  made  up 
from  the  subscription  book,  and  contain  several  columns.  The 
first  gives  the  date  the  instalment  is  due;  second,  the  name  of 
each  subscriber ;  third,  the  number  of  shares ;  fourth,  the  amount 
of  the  instalment  due  (in  dollars) ;  sixth,  interest  on  instalments 
(for  use  when  the  instalment  is  not  paid  on  due  date) ;  seventh, 
amount  received  on  instalments;  eighth,  ledger  folio;  ninth, 
date  of  payment  of  instalments.  The  individual  subscribers  are 
credited  for  payments  in  the  stock  ledger  accounts,  and  the  to- 
tals of  instalments  paid  are  carried  to  the  general  cash  book. 
The  instalment  scrip  book  is  a  receipt  book  made  with  special 
reference  to  the  instalments  to  be  paid.  When  all  the  instal- 
ments are  paid,  these  receipts  are  returned  to  the  corporation  by 
subscribers,  and  given  in  exchange  for  certificates  of  stock,  one 
certificate,  of  course,  being  issued  for  one  complete  series  of  in- 
stalment scrips.  The  following  is  a  form  for  such  scrip,  consist- 


BOOKKEEPING,   AUDITING   AND   ACCOUNTING.  179 

ing  of  stub  and  receipt.   Brackets  []  indicate  blanks  to  be  filed 
by  the  secretary : 


Installment  Scrip  No.  [1]. 

Gray  Manufacturing  Co., 
Chicago,  111. 
[100]  shares. 

[First]  Installment,   [10] 
per  cent.      [$1,000.00]. 

Installment  due,  [Date]. 
Installment  paid,  [Date]. 
Received  the  scrip. 


[$1,000.00].  [100]  Shares. 

GRAY  MANUFACTURING  COMPANY, 

Chicago,  111.,  [Date]. 

Received  from the 

sum  of  [One  Thousand]  Dollars,  which  is  the 
[first]  installment  of  [10]  per  cent  in  payment 
on  subscription  for  [one  hundred]  shares  of 
the  capital  stock  of  the  GRAY  MANUFACTUR- 
ING COMPANY. 

Said  shares  are  reserved  and  set  apart  for 
the  subscriber  or  [his]  assigns  on  condition 
of  the  fulfillment  of  the  terms  of  subscription. 


Secretary President. 

§  74.    The  Corporation  Calendar. 

Every  corporation  should  have  a  corporate  calendar  as  a  re- 
minder of  those  formal  matters  of  corporate  concern  that  must 
be  attended  to  at  stated  times.  The  calendar  is  a  book  or  card 
of  memoranda,  arranged  in  chronological  order,  relative  to  such 
matters  of  corporate  procedure  and  business  as  paying  taxes 
(franchise,  county  and  city),  notices  of  stockholders'  and  direct- 
ors' meetings,  reports  to  state  officials,  etc.  In  preparing  a  calen- 
dar, the  secretary  of  the  corporation  will  examine  the  statutes  of 
the  state  under  which  the  corporation  is  organized,  and  the  stat- 
utes of  the  state  or  states  in  which  it  is  doing  business,  so  as  to» 
include  in  the  calendar  all  the  obligations  imposed  on  the  cor- 
poration and  the  time  for  performing  the  obligations. 

The  following  corporate  calendar  is  prepared  for  the  year 
1905,  for  a  corporation  which,  according  to  the  statute  under 
which  it  was  organized,  the  laws  of  the  place  where  it  is  doing 
business,  and  its  own  by-laws,  holds  its  annual  stockholders' 
meeting  on  the  last  Monday  in  January,  a  directors'  meeting  on 
the  first  Tuesday  in  each  month,  makes  an  annual  report  to  the 
state  auditor  on  the  last  day  of  January,  lists  its  property  for 
taxation  March  first,  is  entitled  to  a  hearing  before  the  taxing 
board  within  the  last  half  of  the  month  of  June,  pays  taxes  on 
or  before  the  first  Mondays  of  May  and  November,  pays  a  semi- 


180  MODERN   BUSINESS   CORPORATIONS. 

annual  dividend  following  the  directors'  meetings  in  January 
and  July,  closes  its  stock-transfer  books  twenty  days  before  each 
stockholders'  meeting,  and  requires  five  days'  notice  of  direc- 
tors' meetings  and  ten  days'  notice  of  stockholders'  meetings. 
In  the  case  of  reports,  payment  of  taxes,  etc.,  it  is  well  to  make 
a  memorandum  ten  days  or  more  before  the  expiration  of  the 
time  allowed  for  completing  the  work.  When  the  regular  day  for 
doing  any  act,  such  as  giving  notice,  etc.,  falls  on  Sunday,  the 
memorandum  is  made  on  the  preceding  Saturday.  The  July 
meeting  of  the  directors  falling  on  a  holiday  (the  Fourth)  the 
calendar  provides  for  holding  the  meeting  on  the  next  day. 


Corporate  calendar  of  the Company  of 

1905. 

January 

3.  Directors'  meeting. 

5.  Payment  of  semi-annual  dividend. 

10.  Close   transfer  books   for   annual   stocksholders'   meeting  on 
January  30. 

20.  Notify  stockholders  of  annual  meeting  on  January  30. 

21.  Prepare  annual  report  for  state  auditor  before  January  31. 

30.  Annual  meeting  of  stockholders. 

31.  Forward  annual  reports  to  state  auditor. 

February 

2.  Mail  notices  of  directors'  meeting  on  February  7. 
7.  Directors'  meeting. 
18.  Prepare  for  listing  property  for  taxation  March  1. 

March 

1.  List  corporation  property  for  taxation. 

2.  Mail  notices  of  directors'  meeting  on  March  7. 
7.  Directors'  meeting. 

30.  Mail  notices  of  directors'  meeting  on  April  4. 

April 

4.  Directors'  meeting. 

21.  Taxes  must  be  paid  within  ten  days. 

22.  Mail  notices  of  directors'  meeting  on  May  2. 

May 

1.  Last  day  for  paying  taxes. 

2.  Directors'  meeting. 


BOOKKEEPING,   AUDITING   AND  ACCOUNTING.  181 

June 

1.  Mail  notices  of  directors'  meeting  on  June  6. 

5.  Tax  Board  of  Review  meets  June  15. 

6.  Directors'  meeting. 

15.  Tax  Board  of  Review  meets. 

29.  Mail  notices  of  directors'  meeting  on  July  4-5. 

July 

4.  Holiday. 

5.  Directors'  meeting. 

6.  Payment  of  semi-annual  dividend. 

27.  Mail  notices  of  directors'  meeting  on  August  1. 

August 

1.  Directors'  meeting. 

31.  Mail  notices  of  directors'  meeting  on  September  5. 

September 

5.  Directors'  meeting. 

28.  Mail  notices  of  directors'  meeting  on  October  3. 

October 

3.  Directors'  meeting. 
21.  Taxes  must  be  paid  by  November  6. 

November 

2.  Mail  notices  of  directors'  meeting  on  November  7. 

6.  Last  day  for  paying  taxes. 

7.  Directors'  meeting. 

30.  Mail  notices  of  directors'  meeting  on  December  5. 

December 

5.  Directors'  meeting. 

§75.    BOOKS  BEQTJIBED  BY  LAW. 

The  kind  of  books  a  corporation  keeps  is  usually  left  to  the 
discretion  of  its  directors.  But  there  are  laws  in  some  states 
which  require  that  corporations  shall  keep  a  certain  book  (it  is 
almost  invariably  a  stock  book)  or  books.  The  New  York  law, 
for  instance,  requires  that  "every  stock  corporation  must  keep 
at  its  office  correct  books  of  account  of  all  its  business  and  trans- 
actions, and  a  book  to  be  known  as  a  stock  book,  containing  an 
alphabetical  list  of  stockholders  of  the  corporation  showing  resi- 
dence, number  of  shares  held  by  each,  the  time  when  they  became 
owners,  and  tHe  amount  paid  thereon."  A  board  of  directors  of 


182  MODERN   BUSINESS   CORPORATIONS. 

any  corporation  should  know  the  laws  as  to  books  both  of  the 
parent  state  and  the  state  in  which  the  principal  offices  are  lo- 
cated and  also  of  the  foreign  states  in  which  the  corporation 
"does  business/'  The  New  York  law  requires  that  "every  for- 
eign stock  corporation  having  an  office  for  the  transaction  of 
business  in  this  state,  except  moneyed  and  railroad  corporations, 
shall  keep  therein  a  book  to  be  known  as  a  stock  book,  etc." 
There  are  penalties  for  non-compliance  in  the  various  states 
having  these  provisions,  so  that  a  board  may  save  trouble  and 
expense  by  familiarizing  itself  with  the  laws  on  this  subject. 


PART  VIII. 

DISSOLUTION,  CONSOLIDATION,  AND  REORGANIZA- 

TION  OF  PEIVATE  CORPORATIONS  AND 

RENEWAL  OF  CHARTER. 


183 


DISSOLUTION,    CONSOLIDATION   AND   REORGANIZATION 

OF  PRIVATE  CORPORATIONS  AND  RENEWAL 

OF  CHARTER. 

§  76.  Dissolution  of  a  Private  Corporation. 

77.  Consolidation  of  Private  Corporations. 

78.  Reorganization  of  a  Private  Corporation. 

79.  Renewal  of  Charter. 

§  76.     DISSOLUTION  OF  A  PRIVATE  CORPORATION. 

There  are  five  ways  in  which  a  corporation  may  cease  to  exist. 
If  it  is  created  to  exist  for  a  given  term  of  years,  named  in  the 
charter,  it  dies  at  the  end  of  that  time.  Second,  the  charter 
may  be  repealed  by  the  legislature  of  the  state  which  granted 
it,  if  the  statute  contains  a  clause,  which  most  statutes  do,  pro- 
viding that  it  may  be  repealed  at  any  time.  Third,  the  charter 
may  be  surrendered  voluntarily  by  the  corporation,  with  the  con- 
sent of  the  state.  Fourth,  the  charter  may  be  forfeited  for  non- 
user  or  for  some  wrongful  act  which  has  been  done  by  the  cor- 
poration and  for  which  it  is  called  to  account  by  the  attorney 
general  of  the  state.  A  court  decides  whether  there  is  a  for- 
feiture. Fifth,  when  all  the  members  of  a  corporation  die,  so 
there  are  no  stockholders  left,  it  is  generally  considered  that  the 
corporation  ceases  to  exist.  This  is  the  law,  notwithstanding 
the  fact  that  the  corporation  is  distinct  from  its  members.  The 
last  form  of  extinction  is  almost  inconceivable  in  a  moneyed  cor- 
poration with  transferrable  shares  since,  when  a  stockholder  dies, 
his  shares  pass  to  his  heirs.  There  is,  of  course,  no  such  thing 
as  a  resignation  from  a  moneyed  corporation,  and  no  way 
for  a  stockholder  to  cease  to  be  a  stockholder  except  through 
a  transfer  of  his  stock  or  the  death  of  the  corporation.  Whether 
a  consolidation  of  two  companies  effects  a  dissolution  depends 

185 


186  MODERN   BUSINESS    CORPORATIONS. 

upon  the  terms  of  the  statute  under  which  the  consolidation  is 
effected.  One  corporation  may  absorb  another  by  purchasing, 
under  statutory  authority,  all  the  shares,  franchises,  and  prop- 
erties of  another  corporation,  and  this  may  work  a  practical  dis- 
solution of  the  selling  corporation. 

A  corporation  is  not  dissolved  by  a  sale  and  assignment  of  all 
its  corporate  property;  by  discontinuing  business;  by  failure  to 
elect  officers  and  directors;  by  the  acquisition  by  one  person  of 
all  the  stock ;  nor  by  insolvency. 

Many  corporations  are  not  successful,  and  fail  in  their  pur- 
pose. Having  neither  sufficient  property  or  debts  to  make  a 
formal  dissolution  necessary,  they  are  simply  abandoned  by  their 
officers  and  stockholders.  Unless  the  charter  is  caused  to  be  for- 
feited by  the  state,  the  corporation  is  not  dissolved  till  the  time 
limit  expires.  Failure  to  pay  taxes  due  to  the  state  is  cause  for 
forfeiture  of  charter.  An  inactive  corporation  may  be  revived 
at  any  time  under  such  a  running  charter  by  paying  delinquent 
taxes  and  other  debts.  Sometimes  persons  intending  to  carry 
on  the  same  line  of  business  as  that  authorized  under  a  charter 
owned  by  an  inactive  corporation  will  buy  the  stock  of  the  in- 
active corporation  at  a  nominal  price,  which  is  less,  usually,  than 
it  would  take  to  buy  a  new  charter,  and  will  conduct  their  busi- 
ness under  that  charter's  authority.  Care  must  be  exercised 
that  they  are  not  thereby  acquiring  liabilities  of  which  they  had 
no  knowledge.  When  a  corporation  becomes  insolvent,  proper 
legal  proceedings  may  bring  about  the  appointment  of  a  re- 
ceiver, who  will  settle  the  affairs  of  the  corporation  and  usually 
dissolve  it. 

Voluntary  dissolution  may  be  brought  about  by  vote  of  a 
given  fraction  (usually  two-thirds)  or  all  of  the  stockholders  of 
a  corporation,  according  to  statutory  provisions.  In  the  ab- 
sence of  statutory  provisions,  a  dissolution  may  usually  be 
brought  about  by  consent  of  a  majority  of  the  stockholders  and 
a  decree  of  a  court  of  competent  jurisdiction ;  or  it  may  certainly 
be  brought  about  by  consent  of  all  the  stockholders.  Most  states 
give  the  procedure  for  bringing  about  voluntary  dissolution,  and 
this  procedure  should  be  carefully  followed  so  that  all  the  stock- 


DISSOLUTION,    CONSOLIDATION,    AND    REORGANIZATION.       187 

holders  and  creditors  may  be  bound  by  the  action  taken.  The 
usual  process  is  for  the  directors  to  call  a  stockholders'  meeting, 
advertise  it  and  notify  the  stockholders,  and  give  evidence  to 
the  state  that  proper  consent  has  been  given  to  the  dissolution. 
The  directors  are  then  given  the  power  to  pay  creditors  and  to 
divide  the  remaining  property  among  the  stockholders.  It  has 
been  held  that  a  dissolution  of  a  corporation  does  not  destroy 
the  obligation  of  a  corporation's  contracts,  as  the  equitable 
rights  of  creditors  survive  the  act  of  dissolution  and  attach  to 
the  assets  and  property  of  the  corporation  in  the  hands  of  its 
liquidators. 

§  77.     CONSOLIDATION  OF  PRIVATE  CORPORATIONS. 

Consolidations  of  corporations  must  be  made  under  statutory 
authority,  since  no  corporation  exists  otherwise.  For  most  pur- 
poses a  complete  consolidation  of  the  capital  stock,  franchises, 
and  properties  of  two  or  more  corporations  creates  a  new  cor- 
poration. But,  notwithstanding,  rights  of  action  against  the  con- 
stituent corporations  will  survive  against  the  new  corporation. 
It  is  a  principle  of  law  that  a  corporation  succeeding  a  corpora- 
tion whose  property  and  rights  it  has  acquired,  must  take  the 
obligations  of  that  corporation  along  with  the  benefits.  Under 
some  jurisdictions  it  has  been  held  that  a  successor  corporation 
is  bound  to  the  creditors  of  a  constituent  corporation  only  to  the 
amount  of  property  received  from  it,  and  that  a  creditor  may 
prevent  a  corporation  which  owes  him  money  from  consolidat- 
ing. A  domestic  corporation  may  consolidate  with  a  foreign 
corporation,  but  there  must  be  express  statutory  authority  there- 
for. 

Two  companies  may  be  united  by  the  directors  taking  out  a 
new  charter  and  by  the  formal  sale  and  assignment  of  the  assets 
of  each  company  to  the  new  company,  which  may  pay  for  the 
assets  in  stock.  This  is  not  a  consolidation  in  law,  and  the  new 
corporation  is  entirely  separate  and  distinct,  and  is  liable  for 
the  debt  of  the  corporation  whose  assets  were  conveyed  to  it  only 
to  the  extent  of  the  assets  received.  In  most  of  the  states  the 


188  MODERN   BUSINESS   CORPORATIONS. 

statutes  grant  the  power  to  consolidate  to  certain  classes  of  cor- 
porations ;  and  the  method  of  consolidating,  as  well  as  the  rights 
and  powers  of  the  new  corporation  thus  created,  are  defined  in 
more  or  less  detail.  In  Indiana,  articles  of  consolidation  are  filed 
with  the  secretary  of  state  and  are  treated  as  the  articles  of  in- 
corporation of  the  new  consolidated  corporation  and  the  fee  is 
determined  by  the  amount  of  capital  stock  of  the  new  corpora- 
tion created.  The  statutes  of  this  state  also  provide  that  the  con- 
solidation of  two  corporations  does  not  work  the  dissolution  of 
either.  Connecticut  provides  that  corporations  of  a  similar  kind 
may  consolidate  into  a  single  corporation  which  may  be  either 
one  of  the  old  corporations  or  a  new  corporation.  It  further 
provides  that  the  directors  of  the  corporations  to  be  consolidated 
may  enter  into  an  agreement  prescribing  the  terms  and  condi- 
tions of  consolidation,  stating  the  name  of  the  new  corporation, 
names  and  addresses  of  directors,  provisions  as  to  stock,  etc., 
the  manner  of  converting  the  shares  of  each  constituent  corpora- 
tion into  shares  of  the  new,  together  with  such  other  matters  as 
are  required  in  an  original  certificate  of  incorporation,  and  after 
proper  notice  to  the  stockholders  of  the  constituent  corporations 
and  an  approving  vote  of  two-thirds  of  the  stockholders  of  each 
class  of  outstanding  stock,  with  other  procedure  as  in  filing  an 
original  certificate,  the  consolidation  is  completed.  Consolidat- 
ing corporations  must  be  of  the  same  class  or  similar  classes,  and 
for  the  same  purpose  or  auxiliary  purposes,  and  the  articles  of 
consolidation,  like  articles  of  incorporation,  must  be  in  accord 
with  the  statute  under  which  they  are  framed.  The  procedure 
for  consolidation  given  by  a  state  should  be  adhered  to  strictly, 
so  that  the  resulting  organization  may  be  free  from  defects  and 
the  stockholders  and  creditors  of  the  constituent  corporations 
may  be  bound  by  it. 

§  78.    REORGANIZATION  OF  A  PRIVATE  CORPORATION. 

It  sometimes  happens  that  the  articles  of  association  of  a  cor- 
poration are  found  to  be,  or  in  time  become,  unsuited  to  the  busi- 
ness for  which  they  were  drawn.  Further,  it  may  not  be  possible 


DISSOLUTION,    CONSOLIDATION,    AND    REORGANIZATION.      189 

to  amend  the  articles  so  as  to  make  them  suitable.  The  statutes 
under  which  they  were  prepared  may  not  permit  an  amendment 
in  the  direction  which  would  place  the  corporation  on  the  basis 
desired.  Or  it  may  be  learned  that  the  laws  of  the  parent  state 
do  not  give  as  free  scope  to  the  conduct  of  the  business  as  is  desir- 
able, or  that  they  are  inhibitory  in  some  other  way.  Or,  the  cor- 
poration may  become  insolvent,  so  that  the  only  way  to  protect 
its  assets  is  to  sell  them  to  a  new  corporation,  which  will  con- 
tinue the  same  business  under  the  more  favorable  circumstances 
of  freedom  from  debt,  the  old  corporation  having  been  dissolved. 
This  is  often  done  when  the  stock  of  the  old  corporation  has  been 
issued  full  paid  and  non-assessable,  and  only  part  of  the  stock- 
holders were  willing  to  pay  a  voluntary  assessment  in  order  to 
raise  the  money  to  put  the  corporation  on  its  feet  again.  The 
stockholders  in  the  new  corporation  are  usually  those  who  were 
willing  to  put  more  money  into  the  enterprise  through  an  assess- 
ment. Or,  there  may  be  an  attempt  to  "freeze  out"  undesirable 
stockholders.  In  any  of  these  instances  a  reorganization  of  a  cor- 
poration may  be  necessary.  A  transference  of  the  assets  of  the 
old  corporation  is  made  by  voluntary  or  forced  sale  to  the  new, 
and  stock  is  issued  to  some  or  all  the  stockholders  of  the  old 
corporation  upon  an  agreed  plan  of  distribution. 

As  was  said  under  the  subject  of  consolidation,  the  successor 
corporation  in  the  case  of  reorganization  is  a  new  corporation, 
but  the  assets  it  receives  from  the  old  corporation  may  be  fol- 
lowed by  creditors  and  be  subjected  to  the  payment  of  creditors' 
claims,  unless  it  has  acquired  the  assets  at  forced  sale,  as  a  re- 
ceiver's sale,  in  which  case  the  proceeds  of  the  sale  will  have  been 
distributed  in  payment  of  creditor's  claims  and  there  is  no  liabil- 
ity on  the  part  of  the  successor  corporation. 

Where,  however,  a  corporation  takes  advantage  of  a  statute 
which  permits  a  corporation  organized  under  a  previous  statute 
to  reincorporate  under  the  statute  superseding  it,  its  identity 
continues,  and  its  liabilities  continue.  The  procedure  for  reor- 
ganizing by  voluntary  sale  is  as  follows :  First,  a  meeting  of  the 
stockholders  of  the  old  corporation,  authorizing  the  directors  to 
sell  and  outlining  plans  and  arrangements;  second,  meeting  of 


190  MODERN   BUSINESS    CORPORATIONS. 

the  directors  of  the  old  corporation,  authorizing  the  proper  officer 
to  communicate  the  agreed  plans  and  arrangements  to  the  new 
corporation,  and  to  conduct  the  sale  if  the  plans  are  approved; 
third,  communication  of  plans  by  officers  of  the  old  corporation ; 
fourth,  meeting  of  the  incorporators  and  stock  subscribers  of 
the  new  corporation,  who  adopt  a  resolution  authorizing  their 
board  of  directors  to  accept  the  proposition  of  the  old  corpora- 
tion ;  fifth,  meeting  of  directors  of  the  new  corporation  to  accept 
proposition  and  to  authorize  proper  officers  to  purchase  the  as- 
sets of  the  old  corporation ;  sixth,  formal  acceptance  communi- 
cated by  officers  of  new  corporation  to  officers  of  the  old ;  seventh, 
payment  of  creditors  of  old  corporation ;  eighth,  formal  transfer 
of  assets;  ninth,  payment  for  assets  in  cash  or  stock.  The  same 
care  should  be  taken  that  statutory  and  common  law  require- 
ments are  fulfilled  as  is  taken  in  consolidations. 

§  79.     RENEWAL  OF  CHARTER. 

If  a  charter  expires,  a  corporation  may  have  it  renewed  accord- 
ing to  statutory  provisions.  The  renewal  of  a  charter  does  not 
create  a  new  corporation,  but  continues  the  existence  of  the  old 
one.  It  has  been  held  that  a  delay  in  application  for  renewal  on 
the  part  of  a  careless  officer  did  not  permit  a  reverter  of  prop- 
erty, but  that  the  renewal,  when  granted,  related  back  to  the 
time  when  the  charter  expired.  Rights  of  action,  of  course,  con- 
tinue under  the  renewal. 


PART  IX. 


FORMS. 


191 


FORMS. 

.f 
Form  1.     Promoter's  Contract. 

Whereas,  the  undersigned  subscribers  contemplate  the  organiza- 
tion of  a  corporation  under  the  laws  of  the  state  (or  territory)  of 

,  to  be  known  by  the  name  of ,  or  by  such  other  name  as 

the  subscribing  stockholders  therein  may  adopt,  having  an  author- 
ized capital  stock  of  $ ,  divided  into shares  of  $ 

each,  for  the  purpose  of  (state  object  of  corporation  briefly). 

It  is  hereby  agreed  by  and  between  said  subscribers  and  (pro- 
moter's name) : 

(1)  That  each  of  said  subscribers  will  take  the  amount  of  stock 
in  said  corporation  set  opposite  his  name  and  pay  for  the  same 
according  to  the  terms  of  a  subscription  contract  this  day  executed 
by  them. 

(2)  That  said  (promoter's  name)  has  heretofore  done  work  and 
performed  services  of  great  value  in  preparing  for  the  organization 
of  said  corporation  and  securing  subscriptions  to  its  capital  stock, 
and   is  to  hereafter  perform  additional  services  in  perfecting  its 
organization  and   securing  bona  fide  subscriptions  to  the   capital 
stock  of  said  corporation  aggregating   (aside  from  the  stock  taken 

by  the  subscribers  hereto)  the  sum  of  $ ,  or  such  part  thereof  . 

as  the  subscribing  stockholders  may  deem  necessary  to  dispose  of. 

(3)  Said  (promoter's  name)  shall  have days  in  which  to 

secure  subscriptions  for  the  aforesaid  $ of  capital  stock  of 

said  company,  and  if  he  has  failed  to  do  so  at  the  end  of  that  time 
the  subscribers,  at  their  option,  may  extend  his  authority,  or  may 
recall  it,  and  may,  if  they  so  elect,  subscribe  for  the  remaining  por- 
tion of  said  $ of  capital  stock  which  then  remains  unsub- 
scribed for,  or  induce  others  to  take  it,  or  abandon  the  formation 
of  said  corporation. 

(4)  Upon   the   incorporation   of   said   proposed    company   there 
shall  be  issued  to  said  (promoter's  name),  or  to  any  person  desig- 
nated by  him,  by  indorsement  on  this  agreement,  in  payment  for 
his  services  in  effecting  such  incorporation  and  securing  the  afore- 
said  subscriptions  to  the  capital  stock  as  above  provided,    

shares  of  the  capital  stock  of  said  corporation. 

Provided,  That  if  said    (promoter's  name)    shall  have  failed  to 
MOD.  Bus.  CORP.— 13 

193 


194  MODERN   BUSINESS    CORPORATIONS. 

secure   bona  fide  subscriptions   to   said   capital   stock  in  the   full 

amount  of  $ ,  there  shall  be  issued  to  him  only  such  proportion 

of shares  of  stock  as  the  capital  stock  for  which  he  has  ob- 
tained subscriptions  is  of  $ ,  the  whole  amount  for  which  he-' 

hereby  undertakes  to  solicit  subscriptions. 

Provided,  further,  That  if  said  company  be  incorporated  before 
the  time  allowed  said  (promoter's  name)  for  obtaining  subscrip- 
tions has  expired  and  said  (promoter's  name)  shall  thereafter, 
under  the  terms  of  this  contract  secure  additional  bona  fide  sub- 
scriptions to  the  capital  stock  of  said  company,  as  above  provided, 
shares  of  stock  shall  be  issued  within  thirty  days  after  the  said 
time  allowed  for  obtaining  subscriptions  has  expired  to  (promoter's 
name),  or  to  his  assignee,  as  above  provided,  in  the  proportion  of 
one  share  of  stock  for  each  $ of  capital  stock  for  which  sub- 
scriptions are  so  secured  by  him. 

IN  WITNESS  WHEREOF  the  said  subscribers  have  hereunto  attached 
their  names  and  designated  the  number  of  shares  taken  by  each  of 
them,  and  said  (promoter's  name)  has  agreed  to  the  above  terms. 

SHAKES 


I  agree  to  the  above  terms. 

(Signed  by  promoter.) 


Form  2.    Subscription  by  Owners  of  Business  on  Executing 
Agreement  with  Promoters. 

We,  the  undersigned,  hereby  subscribe  for  and  agree  to  purchase 

(on  the  terms  and  conditions  hereinafter  stated)  shares  of 

the  capital  stock  of  the  ,  a  corporation  to  be  hereafter  or- 
ganized under  the  laws  of  the  state  (or  territory)  of ,  having 

$ of  capital  stock,  divided  into  shares  of  $100  each, 

said  stock  to  be  delivered,  fully  paid  and  non-assessable,  upon  pay- 
ment of  the  purchase  price,  as  hereinafter  provided. 

It  is  mutually  agreed  between  the  several  subscribers  hereto  and 
promoter  of  said  company  that  this  subscription  is  condi- 
tioned upon  bona  fide  contracts  by  solvent  parties  being  obtained 

to  purchase  shares  of  the  treasury  stock  of  said  company, 

hereinafter  mentioned,  to  be  paid  for  in  cash  at  the  rate  of  not  less 
than  $50  per  share,  and  the  organization  of  said  company  within 
thirty  days  from  this  date. 

The  shares  of  stock  hereby  subscribed  are  to  be  issued  by  said 


FORMS.  195 

(name  of  company)  fully  paid  and  non-assessable, shares  to 

A, shares  to  B  and shares  to  C,  and  are  to  be  paid  for 

in  full  by  the  conveyance  by  these  subscribers  to  said  (name  of 
company)  of  the  following  described  land:  (describing  it),  together 
with  the  flouring  mill  thereon  situate,  and  all  the  personal  prop- 
erty, business,  good  will  and  effects  of,  or  pertaining  to,  the  mill 
and  the  milling  business  heretofore  carried  on  by  the  partnership 
firm  of  A,  B  and  C,  at  said  location,  except  (enumerate  property 
reserved),  the  value  of  which  property  and  goodwill  so  to  be  con- 
veyed is  hereby  agreed  to  be  $ ( the  face  value  of  shares 

subscribed  for),  and  this  subscription  shall  be  binding  only  in  case 
payment  by  the  conveyance  of  said  property  is  accepted  by  the 
company. 

In  consideration  of  the  organization  of  such  company  and  the 
exchange  of  shares  of  its  stock  for  the  milling  property,  as  above 
provided,  the  undersigned  subscribers  agree  to  donate  to  said 
(name  of  corporation)  shares  of  stock  issued  to  them  as  above 

provided,    fully   paid   and    non-assessable,   as    follows:     A,    

shares;  B,  shares;  C, shares;  the  same  to  be  placed 

in  the  treasury  of  the  said  company  as  treasury  stock,  and  sold  to 
provide  a  working  capital. 

IN  WITNESS  WHEREOF  the  undersigned  subscribers  and  said  pro- 
moter have  hereunto  set  their  hands  and  seals  this day  of 

,  1904. 

A 

B 

C 

Agreed  to  by  the  promoter  of  the  company. 

(Signed)    


Form  3.    Stock  Subscription  Given  to  Promoter. 

We,  the  undersigned,  hereby  subscribe  for  and  agree  to  purchase 
(subject  to  the  terms  and  conditions  herein  stated)  the  number  of 
shares  set  opposite  our  respective  names  of  the  par  value  of  $100 
each  of  the  treasury  stock  of  the  ,  a  corporation  to  be  here- 
after organized  under  the  laws  of  the  state  (or  territory)  of , 

said  stock  to  be  delivered,  fully  paid  and  non-assessable,  upon  pay- 
ment of  the  purchase  price,  as  hereinafter  provided. 

It  is  mutually  agreed  between  the  several  subscribers  hereto, 

and promoter  of  said  company,  that  the  said  subscription  is 

conditioned  upon  bona  fide  subscriptions  being  obtained  for 


196  MODERN"   BUSINESS   CORPORATIONS. 

shares  of  the  said  treasury  stock  on  the  terms  herein  stated  within 
thirty  days  from  the  date  thereof. 

We  severally  agree  to  accept  said  shares  subscribed  for  and  to 
pay  for  them  at  the  rate  of  $50  for  each  share  to  the  treasurer  of 
said  company  as  soon  as  the  said  company  is  organized  and  its 
treasury  stock,  fully  paid  and  non-assessable,  is  ready  for  delivery. 

(Dated)    ,  1904. 

NAMES.  ADDRESSES.  SHARES.  AMOUNT. 


I  agree  to  the  above  terms. 

(Signed  by  promoter). 


Form  4.     Subscription  Blank,  After  Organization. 


To  the Company,  Cincinnati,  Ohio: 

Enclosed  find  certified  check  in  payment  for  20  per  cent,  of  the 

cost  of   shares  of  the  common   (or  preferred)   stock  of  the 

company,  for  which  I  hereby  subscribe  and  agree  to  pay  the 

remaining  80  per  cent  of  the  par  value  of  said  shares,  being  the 

sum  of  $ ,  in  instalments  of  not  more  than  one-fourth  thereof 

each  thirty  days  upon  call  of  the  board  of  directors  of  said  com- 
pany, and  five  days'  notice  given  to  me  by  mail. 

(Signed)    

Street  

City  

State  

Date  .  .,  1905. 


Form  5.    Underwriting  Agreement. 


THE    UNITED    STATES    SHIPBUILDING   COMPANY. 

A  corporation  to  be  organized  under  the  laws  of  the  state  of  New 
Jersey,  either  by  that  or  some  similar  name,  proposes  to  acquire  the 


FORMS.  197 

plants  and  equipment  of  the  following  concerns,  or  their  capital 
stocks,  free  from  any  liens: 

THE  UNION  IRON  WORKS San  Francisco,  California. 

THE  BATH  IRON  WORKS,  LIMITED  ^j 

and  L Bath,  Maine. 

THE  HYDE  WINDLASS  COMPANY, 
THE  CRESCENT  SHIP  YARD,  ^| 

and  I  Elizabethport,  New  Jersey 

THE  SAMUEL  L.  MOORE  &  SONS  Co.  J 

THE  EASTERN  SHIPBUILDING  COMPANY New  London,  Conn. 

THE  HARLAN  &  HOLLINQSWORTH  Co. ..  .Wilmington,  Delaware. 

and 
THE  CANDA  MANUFACTURING  COMPANY  . . .  Carteret,  New  Jersey. 


UNDERWRITING  AGREEMENT. 

For  $9,000,000  Series  A  First  Mortgage,  Five  Per  Cent.  Sinking 
Fund,  Gold  Bonds,  due  1932,  part  of  an  authorized  issue  of  $16,000,- 
000,  Bonds  of  $1,000  each,  $5,500,000  being  withdrawn  from  public 
issue  for  disposal  under  the  Vendor's  and  Subscribers'  Contracts, 
and  $1,500,000  being  Reserved  in  the  Treasury  of  the  Company.  Ad- 
ditional Bonds  may  be  issued  only  for  the  purpose  of  acquiring  Ad- 
ditional Plants  and  Equipment  and  for  Improvements  and  Better- 
ments, upon  such  Terms  and  Conditions  as  shall  be  Approved  by  the 
Holders  of  a  Majority  of  the  Bonds  under  the  Present  Issue  Out- 
standing at  the  Time  of  such  Approval. 


We,  the  undersigned,  each  for  himself,  with  The  Mercantile  Trust 
Company,  for  itself  and  for  the  United  States  Shipbuilding  Com- 
pany, and  to  and  with  each  other,  agree  to  subscribe  to,  receive  and 
pay  for  the  amount  of  five  per  cent,  first  mortgage,  sinking  fund, 
gold  bonds  of  the  United  States  Shipbuilding  Company  of  one  thou- 
sand dollars  each,  set  opposite  our  respective  signatures  hereto,  at 
the  price  of  $900  for  each  bond,  25  per  cent,  to  be  paid  upon  allot- 
ment and  the  balance  upon  the  demand  of  The  Mercantile  1'rust 
Company. 

We  further  agree  to  receive  and  pay  for  any  smaller  amount  than 
that  subscribed  for  which  may  be  allotted  to  us  respectively. 

The  conditions  of  this  underwriting  agreement  are  as  follows: 

(1)  That  this  agreement  shall  not  be  binding  upon  the  under- 
signed unless  the  entire  amount  of  $9,000,000  of  bonds  shall  have 
been  underwritten. 

(2)  That  within  such  reasonable  time  as  shall  be  fixed  by  The 
Mercantile  Trust  Company  the  said  $9,000,000  of  bonds,  less  any 


198  MODERN   BUSINESS    CORPORATIONS. 

amount  withdrawn  by  the  underwriters,  as  hereinafter  set  forth, 
will  be  offered  to  the  public,  through  such  banker  or  bankers  or 
brokers  as  shall  be  designated  by  The  Mercantile  Trust  Company, 
for  subscription  at  not  less  than  95  per  cent. 

(3)  With  the  consent  of  The  Mercantile  Trust  Company,  any 
other  concern  may  be  included  in  this  combination,  or  others  sub- 
stituted therefor,  provided  the  working  efficiency  or  values  are  not 
lessened  or  impaired. 

(4)  That,  if  the  amount  of  bonds  subscribed  and  paid  for  upon 
such  public  issues  be  at  least  equal  to  the  amount  of  bonds  so  of- 
fered to  the  public,  then  all  liability  under  this  agreement  shall 


(5)  That,  in  case  the  amount  of  bonds  subscribed  for  upon  such 
public  offering  shall  be  less  than  the  total  amount  of  bonds  so 
offered  to  the  public,  or  in  case  the  bonds  subscribed  for  upon  such 
public  issue  shall  not  be  paid  for  to  an  amount  equal,  at  the  rate 
of  95  per  cent.,  to  the  total  of  such  public  offering,  then  such  defi- 
ciency in  subscriptions  and  payments  will,  upon  the  demand  of  The 
Mercantile  Trust  Company,  be  made  good  by  the  subscribers  hereto 
in  the  manner  aforesaid,  pro  rata  in  the  proportion  their  subscrip- 
tions for  bonds  not  withdrawn  by  them  from  public  issue  bear  to 
the  total  amount  of  bonds  so  offered  to  the  public. 

(6)  That  each  underwriter  shall  receive  in  preferred  and  com- 
mon stock  of  the  United  States  Shipbuilding  Company  25  per  cent, 
of  the  par  value  of  the  bonds  hereby  underwritten  in  each  kind  of 
stock,  and  also  that  all  the  proceeds,  not  to  exceed  5  per  cent.,  real- 
ized from  the  sale  of  the  bonds  at  public  issue  in  excess  of  90  per 
cent.,  after  deducting  issue  expenses,  shall  belong  to  the   under- 
writers. 

(7)  That  any  underwriter  shall  have  the  option  of  withdrawing 
from  the  public  issue  any  of  the  bonds  hereby  underwritten  by  him, 
provided  that  he  notify  The  Mercantile  Trust  Company,  five  days 
prior  to  the  date  fixed  for  the  public  issue,  that  he  elects  to  pur- 
chase said  bonds,  provided  that,  in  the  proportion  of  the  bonds  so 
purchased,  he  waives  his  said  right  to  participate  in  the  cash  pro- 
ceeds realized  from  the  public  issue. 

(8)  That  no  underwriter  shall  sell  or  offer  for  sale  the  bonds  so 
purchased,  nor  any  of  the  bonus  shares  he  receives,  until  twelve 
months  after  the  date  of  payment,  without  the  consent  of  The  Mer- 
cantile Trust  Company. 

New  York,  April  19,  1902. 

NAME.  ADDRESS.  BONDS   UNDERWRITTEN. 


FORMS.  199 

Form  6.     Purposes  of  Incorporation. 

The  purposes  for  which  a  corporation  is  formed  should  be 
explicitly  and  comprehensively  stated  in  the  articles  of  associa- 
tion. Mr.  James  B.  Dill  says  of  the  section  in  which  the  objects 
of  incorporation  are  denned  (Dill  on  New  Jersey  Corporations, 
p.  21)  :  "This  being  the  important  part  of  the  certificate  of 
incorporation,  great  care  should  be  taken  that  the  objects  and 
purposes  of  the  company  are  stated  in  the  fullest  and  clearest 
manner  possible,  because  the  company  cannot  undertake  any 
business  not  authorized  by  its  charter,  and  not  even  the  fullest 
sanction  given  by  the  shareholders  will  make  valid  an  act  which 
is  outside  the  powers  of  the  company.  Directors  undertaking 
any  such  business  may  become  personally  liable  for  loss,  and 
great  inconvenience  follows  from  companies  having  too  limited 
powers."  He  questions  how  much  in  detail  the  objects  should  be 
expressed,  and  says:  "The  balance  of  disadvantage  decidedly 
attaches  to  too  narrowly  defined  objects.  It  is  easier  to  com- 
press, so  to  speak,  the  business  of  a  company  within  the  limits 
of  large  objects  and  broad  powers  than  to  develop  business  by 
extension  in  the  face  of  narrowly  defined  objects.  It  is  better 
to  give  latitude  to  the  objects  and  powers  as  contained  in  the 
certificate  of  incorporation,  and  to  limit  the  powers  of  directors 
by  the  by-laws,  than  to  run  the  risk  of  the  subsequent  insertion 
in  the  by-laws  or  in  the  minutes  of  the  board  of  directors  of  a 
provision  intended  to  meet  some  pressing  requirements  of  the 
business,  which  provision  may  be  found  absolutely  worthless 
because  of  variation  from  the  terms  of  the  certificate  of  incorpo- 
ration. It  is  customary  to  insert  general  words,  such  as,  'In 
general,  to  carry  on  any  other  business,  whether  manufacturing 
or  otherwise.'  But  it  must  be  understood  that  the  courts  limit 
such  words  to  operations  of  a  nature  similar  to  the  business  pre- 
viously mentioned,  and  will  not  include  any  wholly  fresh  busi- 
ness." 

The  following  are  examples  of  the  correct  expression  of  the 
objects  of  certain  kinds  of  corporations.  (Note  should  be  taken 


200  MODERN   BUSINESS   CORPORATIONS. 

of  the  statutes  of  the  state  under  which  one  is  incorporating,  to 
see  that  all  objects  expressed  are  authorized.) 

AGRICULTURAL  IMPLEMENTS. 

To  purchase,  lease  or  otherwise  acquire  lands  and  buildings  for 
the  erection  and  operation  of  factories,  workshops  and  warehouses 
with  suitable  equipment  for  manufacturing  and  selling  agricultural 
implements;  to  manufacture,  buy,  sell,  import,  export  and  deal  in 
agricultural  implements  and  machinery  of  all  kinds,  including  im- 
plements for  stirring,  pulverizing  and  preparing  the  soil,  planting, 
harvesting,  conveying  and  threshing  crops,  and  for  otherwise  con- 
ducting the  operations  of  agriculture. 

APARTMENT  HOUSES. 

To  purchase,  lease  or  otherwise  acquire  real  estate  necessary  to 
the  operations  of  the  company;  to  buy,  lease,  build,  erect,  equip, 
operate,  maintain  and  sell  apartment  houses  and  residence  hotels; 
to  purchase,  lease  install  and  operate  furnaces,  boilers  and  machin- 
ery, to  supply  heat,  steam,  water,  electricity  and  other  means  for 
heating,  lighting,  power,  signalling  and  other  purposes;  to  con- 
struct, install,  lease,  own  and  operate  telephone  exchanges  in  build- 
ings owned  or  operated. 

AUTOMOBILES. 

To  purchase,  lease  and  acquire  lands  and  buildings  for  use  as 
manufactories,  warehouses  and  offices;  to  manufacture,  buy,  sell, 
import  and  export  vehicles  of  all  kinds  propelled  by  mechanical 
power;  engines  and  appliances  for  the  generation  and  use  of  steam, 
electricity,  gasolene,  or  other  form  of  power  for  propelling  carriages, 
wagons,  trucks,  cars,  and  vehicles  of  every  kind  and  description; 
all  parts  and  portions  of  such  vehicles,  engines  and  machinery,  and 
all  things  incident  to  or  used  in  connection  with  the  same. 

BREWERY. 

To  buy,  lease,  own  and  sell  land,  buildings  and  machinery  neces- 
sary to  the  operation  of  a  brewery,  with  warehouses,  agencies  and 
offices;  to  buy  and  sell  grain  of  all  kinds;  to  manufacture,  buy,  sell, 
import  and  export  malt;  to  manufacture,  brew,  prepare,  make,  buy, 
sell,  and  deal  in  beer,  porter,  ale  and  all  other  kinds  and  classes  of 
malt  liquors;  to  manufacture,  buy,  sell  and  refine  liquors  of  all 
kinds;  to  manufacture,  buy,  sell  and  deal  in  ice;  to  build,  operate 
and  maintain  warehouses  and  cold  storage  plants,  and  do  a  general 
warehouse  and  cold  storage  business. 


FORMS.  201 

CONTRACTORS  AND  BUILDERS. 

To  build,  repair,  remodel,  construct  and  equip  houses,  buildings, 
roads,  streets,  sidewalks,  pavements,  sewers,  tunnels,  sub-ways, 
ditches,  conduits,  reservoirs,  railways,  systems  of  waterworks,  manu- 
factories and  all  structures  of  wood,  stone,  brick,  cement,  iron, 
steel  or  other  building  material. 

CHEMICAL  COMPANY. 

To  buy,  lease,  erect,  and  acquire,  hold,  own,  and  manage  real  es- 
tate and  buildings  for  manufactories  and  warehouses;  to  manufac- 
ture, buy,  sell,  import,  export  and  deal  in  chemicals  and  drugs  of 
all  kinds;  to  analyze  and  refine  all  kinds  of  chemicals,  drugs  and 
preparations  thereof;  to  conduct  the  business  of  manufacturers  and 
dealers  in  chemicals,  drugs,  medicines,  compounds,  druggists'  sun- 
dries, chemical,  surgical  and  scientific  apparatus  and  machinery; 
to  invent,  devise,  purchase,  acquire  and  use  secret  processes,  and 
processes  protected  by  patents  and  trade  marks,  and  to  apply  for, 
register,  purchase  and  procure  patents  and  trade-marks,  granting 
exclusive  rights  to  make,  vend,  sell  and  use  compounds,  prepara- 
tions, medicines,  drugs  and  chemical  compositions. 

DEPARTMENT  STORE. 

To  buy,  lease,  construct  or  otherwise  acquire  storerooms,  ware- 
houses and  other  buildings;  to  buy  and  sell  all  kinds  of  merchan- 
dise; to  equip,  conduct  and  operate  a  general  department  store;  to 
establish  therein  stores  for  the  purchase  and  sale  of  dry  goods, 
millinery,  cloth  and  fabrics,  gents'  furnishing  goods,  women's  cloth- 
ing, men's  and  boys'  clothing,  hats,  boots  and  shoes,  furniture,  car- 
pets and  draperies,  drugs  and  chemicals,  hardware,  china  and  glass- 
ware, silver,  jewelry,  pictures,  books,  stationery,  photographs,  and 
photographers'  supplies,  perfumery,  toilet  articles,  bicycles.  [Enu- 
meration made  to  cover  any  classes  of  business  desired.] 

HOTEL  COMPANY. 

To  purchase,  lease,  acquire,  own  and  occupy  lands  and  buildings; 
to  erect,  construct,  equip,  operate,  manage  and  maintain  houses  and 
buildings  for  hotels,  apartment  houses,  dwellings,  offices  and  busi- 
ness structures  for  the  accommodation  of  the  public  and  of  indi- 
viduals; to  lease,  rent  and  let  the  same  to  tenants  and  guests,  to 
manufacture,  furnish  and  sell  to  tenants  and  occupants  of  such 
buildings,  heat,  light,  steam,  water,  electricity  and  power;  to  equip, 
furnish,  keep,  manage  and  operate  restaurants,  cafe's,  bars,  lunch 


202  MODERN   BUSINESS   CORPORATIONS. 

rooms,  tea  rooms,  billiard  halls  and  barber  shops  for  the  accommo- 
dation of  the  public  and  of  individuals. 

MINING. 

To  prospect  for,  locate  and  discover  mines,  mineral  lands  and  de- 
posits of  metals,  ores  and  mineral  substances;  to  locate,  take  up,  pre- 
empt, purchase,  lease,  acquire  by  license,  option,  franchise,  grant, 
gift  or  otherwise,  own,  hold,  possess,  open,  develop,  exploit,  work 
and  operate  mines,  mineral  lands  and  claims  and  mining  rights  in 

or  elsewhere;  to  mine  for  gold,  silver,  lead,  copper,  tin,  iron, 

coal  and  other  metals  and  minerals,  and  to  carry  on  the  business 
of  mining  in  all  its  branches. 

(To  the  above  form  may  be  added  the  following  incidental  pow- 
ers or  any  of  them) : 

To  purchase,  lease,  erect,  build  and  otherwise  acquire  lands  and 
houses  for  office  buildings,  workshops,  warehouses,  stores,  hotels 
and  dwelling  houses  for  use  in  prosecuting  the  business  of  mining; 
to  purchase,  lease  and  otherwise  acquire  lands,  mill  sites,  water 
rights,  tunnel  sites,  dump  rights,  ditch  rights,  easements,  licenses 
and  franchises  for  power  houses,  pumping  plants,  reservoirs,  rail- 
ways, tramways,  and  roads;  to  build,  construct,  erect,  equip,  fur- 
nish, purchase,  lease,  acquire  and  operate  mills,  power  plants,  ma- 
chinery, tunnels,  ditches,  sluices,  flumes,  pipes,  pipe  lines,  reservoirs, 
private  tramways  and  railways,  private  roads,  telegraph  and  tele- 
phone lines;  to  purchase,  lease,  construct,  own  and  operate,  cars, 
locomotives,  vehicles,  boats  and  barges  for  conveying  and  transport- 
ing the  products  of  mines;  to  purchase,  lease  or  otherwise  acquire, 
build,  construct,  equip  and  operate  plants  and  factories  for  crush- 
ing ores  and  extracting  valuable  minerals;  to  buy  and  sell,  crush, 
reduce,  refine,  treat,  smelt,  extract,  calcine,  concentrate  and  manipu- 
late all  kinds  of  ores  and  minerals,  for  the  purpose  of  obtaining 
therefrom  gold,  silver,  lead,  copper,  tin,  iron  and  other  metals,  com- 
binations of  metals  and  other  substances  of  value,  and  marketing 
the  same;  to  engage  in  the  business  of  smelting,  crushing,  reducing, 
refining,  assaying  and  selling  ores  and  mineral-bearing  rocks,  clays 
and  substances;  to  manufacture,  produce,  sell,  lease  and  furnish 
to  others  gas,  electricity,  water,  heat,  light  and  power;  to  transport 
for  hire  goods,  property  and  merchandise,  telegraph  and  telephone 
messages,  heat  and  light;  to  buy,  sell,  manufacture  and  deal  in  ma- 
chinery, powder  and  explosives,  fuses,  caps,  implements,  candles, 
lamps,  tools  and  conveniences  of  every  kind  for  use  in  connection 
with  mining  and  metallurgical  operations. 


FORMS.  203 

OIL  COMPANY. 

To  locate,  purchase,  lease  and  acquire  lands,  mines,  mineral 
claims,  and  exclusive  rights  to  prospect  for,  mine,  bore,  sink  wells 
and  shafts,  produce,  pipe,  convey  and  transport  oil,  petroleum,  gas 
and  other  minerals  of  every  kind  and  description;  to  carry  on  the 
business  of  searching  and  prospecting  for,  mining,  producing,  re- 
fining, manufacturing,  piping,  storing,  transporting,  buying  and 
selling  petroleum  and  other  oils  and  their  products  and  by-products ; 
to  buy,  sell  and  market  the  same;  to  bore,  build,  construct,  pump, 
operate  and  maintain  oil  and  gas  wells;  to  build,  construct,  purchase, 
maintain  and  operate  warehouses,  storage  tanks,  pumping  plants, 
pipe  lines,  refineries,  factories,  mills,  workshops,  laboratories  and 
dwelling  houses  for  workmen  and  others.  To  acquire,  own,  develop, 
operate,  sell  and  dispose  of  mines  of  coal,  iron,  lead,  copper,  silver, 
gold,  tin  and  other  minerals  found  on,  in  or  beneath  any  lands  pur- 
chased, leased  or  otherwise  acquired;  to  manufacture,  buy,  sell,  im- 
port, export,  and  deal  in  pumps,  drills,  fuses,  caps,  candles,  tools, 
and  conveniences  for  use  in  connection  with  mining  or  drilling  for 
oil,  gas  and  other  minerals. 


Form  7.    Articles  Under  the  New  York  Business  Corporations 

Law. 

The  undersigned  (three  or  more),  all  of  whom  are  natural  per- 
sons of  full  age,  two-thirds  of  whom  are  citizens  of  the  United 
States,  and  one  of  whom  is  a  resident  of  the  state  of  New  York, 
hereby  associate  ourselves  together  as  a  corporation  under  the  Busi- 
ness Corporations  Law  of  the  state  of  New  York  and  certify: 

1.  The  name  of  the  corporation  shall  be 

2.  The  purposes  for  which  said  corporation  is  formed  are  as  fol- 
lows: '. 

3.  The  amount  of  capital  stock  of  said  corporation  shall  be 

dollars. 

4.  The  capital  stock  shall  consist  of shares  of dol- 
lars  ($5  to  $100)   each  and  the  amount  of  capital  with  which  the 

said  corporation  will  begin  business  is dollars  (not  less  than 

$500). 

5.  The  principal  business  office  of  said  corporation  shall  be  in  the 
city  (town  or  village)  of ,  county  of ,  state  of  New  York. 

6.  The  duration  of  said  corporation  shall  be 

7.  The  number  of  directors  of  said  corporation  shall  be  

(three  to  thirteen). 


204  MODERN   BUSINESS   CORPORATIONS. 

8.    The  names  and  postoffice  addresses  of  the  directors  of  said 
corporation  for  the  first  year  are  as  follows: 

NAMES.  ADDRESSES. 


9.  The  names  and  post-office  addresses  of  the  subscribers  of  this 
certificate,  and  the  number  of  shares  of  stock  which  each  agrees  to 
take  in  the  corporation  are  as  follows: 

NAMES.  ADDRESSES.  SHARES. 


10.  (Provisions  may  be  added,  for  the  regulation  of  business  and 
conduct  of  the  corporation,  and  any  limitation  upon  its  powers  and 
the  powers  of  its  directors  and  stockholders  which  does  not  exempt 
them  from  an  obligation  imposed  by  law.) 

IN  WITNESS  WHEREOF,  we  have  made  and  signed  this  certificate  in 
duplicate,  this day  of ,  19 .. 


STATE  OF  NEW  YORK,  COUNTY  OF ,  ss : 

Before  me,  a  notary  public  of  said  county  and  state,  personally 

appeared  ,  ,  and  to  me  well  known 

to  be  the  persons  described  in  and  who  executed  the  foregoing  cer- 
tificate, and  severally  acknowledged  that  they  executed  the  same 

for  the  uses  and  purposes  therein  stated,  this day  of , 

19..  

(Seal.)  Notary  Public. 


Form  8.    Articles  Under  New  Jersey  "Act  to  Incorporate  Asso- 
ciations not  for  Pecuniary  Profit." 

The  undersigned  persons  (not  less  than  five)  desiring  to  associate 
themselves  for  a  lawful  purpose  other  than  pecuniary  profit,  as 
hereinafter  stated,  under  the  law  of  the  state  of  New  Jersey,  entitled 
"An  act  to  incorporate  associations  not  for  pecuniary  profit,"  ap- 
proved April  21,  1898,  do  hereby  certify: 

1.  The  name  and  title  by  which  such  corporation  is  to  be  known 
in  law  is 

2.  The  purpose  for  which  it  is  formed  is 

3.  The  place  where  such  corporation  is  to  be  located,  and  where 


FORMS.  205 

its  business  is  to  be  conducted  is  in  the  city  (or  town)  of , 

in  the  county  of ,  state  of  New  Jersey. 

4.  The  number  of  trustees  shall  be  (three  or  more)  and  the  names 
of  the  trustees  selected  for  the  first  year  of  its  existence  are   (it 
is  better  to  give  names  and  places  of  residence). 

5.  The  corporation  may  maintain  an  office  or  offices  at  such  place 
or  places  outside  the  state  of  New  Jersey,  as  may  be  determined  by 
its  trustees,  where  meetings  of  the  trustees  may  be  held  and  business 
may  be  transacted  by  the  trustees,  officers  and  agents  of  the  cor- 
poration. 

6.  The  said  corporation  shall  maintain  an  office  at  No 

street,  in  the  city  (or  town)  of county  of 

,   in   the   state   of   New   Jersey,  with    in 

charge  thereof  during  business  hours,  as  its  resident  agent,  upon 
whom  process  against  said  corporation  may  be  served. 

IN  WITNESS  WHEREOF  we  have  hereunto  set  our  hands  and  seals 

this day  of ,  1905. 

STATE  OF ,  COUNTY  OF ,  ss : 

Be  it  remembered,  that  on  this day  of ,  A.  D.  19 . . , 

before  me,  a ,  personally  appeared , , 

and ,  who  I  am  satisfied  are  the  persons  named  in  and 

who  executed  the  foregoing  certificate,  and  I  having  first  made 
known  to  them  the  contents  thereof,  they  did  each  acknowledge 
that  they  signed,  sealed  and  delivered  the  same  as  their  voluntary 
act  and  deed. 

(Official  signature  and  seal.) 

Form  9.    Articles  of  Voluntary  Association — Merchant,  Etc., 

Indiana. 

The  undersigned  hereby  associate  themselves  together  as  a  cor- 
poration under  the  laws  of  the  state  of  Indiana  for  the  incorpora- 
tion of  Voluntary  Associations,  upon  the  terms  and  conditions  fol- 
lowing: 

1.  The  corporate  name  of  this  association  shall  be  the 

company. 

2.  The  capital  stock  of  the  association  shall  be  of  the  amount  of 
dollars  and  shall  be  divided  into shares  of  one  hun- 
dred dollars  each. 

3.  The  object  and  purpose  of  the  association  shall  be 

(The  act,  1901,  page  289,  1903,  page  116,  enumerates  in  twenty-six 
separate  paragraphs  the  purposes  for  which  such  an  association  may 
l>e  -formed,  and  one  of  such  paragraphs  should   be  substantially 
copied  here.) 


206  MODERN   BUSINESS   CORPORATIONS. 

4.  The  proposed  plan  of  doing  business  is  to  (here  state  in  gen- 
eral and  comprehensive  terms). 

5.  The  names  of  the  incorporating  members  and  their  places  of 
residence  are  as  follows: 

NAMES.  PLACES  OF  RESIDENCE. 

JOHN  SMITH Indianapolis,  Ind. 

WILLIAM  JONES Chicago,  111. 

JAMES  BROWN Cincinnati,  Ohio. 

6.  The  principal  place  of  business  of  the  said  association  shall 
be  at  the  city  of in  the  state  of 

7.  The  term  of  existence  of  the  said  corporation  shall  be  fifty 
years  (or  any  less  number  may  be  named). 

8.  The  corporate  seal  of  the  corporate  organization  shall  be  a 
round  metal  disk  with  the  words  (usually  the  corpo- 
rate name)  around  the  outer  margin  thereof  and  the  word  "seal" 
in  the  center  thereof,  so  mounted  that  it  may  be  used  to  impress 
said  words  in  raised  letters  upon  paper. 

The  directors  who  are  to  manage  the  business  and  prudential 
concerns  of  the  association  shall  be  elected  annually  by  vote  of  the 
stockholders  on  the  first  Monday  of  in  each  year,  be- 
ginning in  the  year  19 . .  Such  meetings  shall  be  held  at  the  prin- 
cipal office  of  the  company  in  the  city  of  ,  state  of 

,  and  each  stockholder  shall  be  allowed  one  vote  in  the 

selection  of  each  director  for  each  share  of  stock  held  by  him.  Im- 
mediately following  the  election  of  directors,  the  board  of  directors 
shall  elect  a  president,  a  secretary  and  a  treasurer,  who  shall  have 
such  duties  and  powers  as  may  be  given  to  them  by  the  by-laws  of 
the  association  or  by  the  said  board  of  directors. 

10.  The  affairs  of  the  association  shall  be  managed  and  controlled 
by  a  board  of  three  (or  any  larger  number)  directors.  The  follow- 
ing persons,  to  wit:  (naming  them)  shall  constitute  the  board  of 
directors  and  manage  the  affairs  of  the  association  for  the  first 
year. 

IN  WITNESS  WHEREOF  we  have  hereunto  set  our  hands  and  seals 
this day  of 1906. 

NAMES.  RESIDENCES. 


STATE  OF  INDIANA,  COUNTY  OF ,  ss: 

Before  me,  a  notary  public  of  said  county  and  state,  personally  ap- 
peared    ,  and   ,  and  acknowl- 

edg_3  the  execution  of  the  foregoing  articles  of  incorporation. 


FORMS.  207 


Witness  my  hand  and  notarial  seal  this   day  of   

1906.   My  commission  expires 

JOHN  SMITH,  Notary  Public. 

Form  10.    Charter  of  the  United  States  Steel  Corporation. 

(After  setting  out  the  action  of  the  directors  and  stockholders 
amending  the  charter  and  the  proposed  amendments.) 

C.  That  the  certificate  of  incorporation  of  said  United  States 
Steel  Corporation,  as  amended,  shall  read  as  follows: 

Amended  Certificate  of  Incorporation  of  United  States  Steel  Cor- 
poration. 

We,  the  undersigned,  in  order  to  form  a  corporation  for  the  pur- 
poses hereinafter  stated,  under  and  pursuant  to  the  provisions  of  the 
act  of  the  legislature  of  the  state  of  New  Jersey,  entitled  "An  Act 
Concerning  Corporations"  (Revision  of  1896),  and  the  acts  amenda- 
tory thereof  and  supplemental  thereto,  do  hereby  certify  as  follows: 

I.  The  name  of  the  corporation  is 

United  States  Steel  Corporation. 

II.  (Here  follows  the  location  of  the  principal  office  in  New  Jer- 
sey, and  the  name  of  the  agent  therein  and  in  charge  thereof.) 

III.  The  objects  for  which  the  corporation  are  formed  are: 

To  manufacture  iron,  steel  manganese,  coke,  copper,  lumber  and 
other  material,  and  all  or  any  articles  consisting,  or  partly  consist- 
ing, of  iron,  steel,  copper,  wood,  or  other  materials,  and  all  or  any 
products  thereof. 

To  acquire,  own,  lease,  occupy,  use  or  develop  any  lands  contain- 
ing coal  or  iron,  manganese,  stone  or  other  ores,  or  oil,  and  any  wood 
lands,  or  other  lands  for  any  purpose  of  the  company. 

To  mine  or  otherwise  to  extract  or  remove  coal,  ores,  stone  and 
other  minerals  and  timber  from  any  lands  owned,  acquired,  leased 
or  occupied  by  the  company,  or  from  any  other  lands. 

To  buy  and  sell,  or  otherwise  to  deal  or  to  traffic  in  iron,  steel, 
manganese,  copper,  stone,  ores,  coal,  coke,  wood,  lumber,  and  other 
materials,  and  any  of  the  products  thereof,  and  any  articles  con- 
sisting or  partly  consisting  thereof. 

To  construct  bridges,  buildings,  machinery,  ships,  boats,  engines, 
cars  and  other  equipment,  railroads,  docks,  slips,  elevators,  water- 
works, gas  works  and  electric  works,  viaducts,  aqueducts,  canals- 
and  other  water-ways,  and  other  means  of  transportation,  and  to 
sell  the  same  or  otherwise  to  dispose  thereof,  or  to  maintain  and 
operate  the  same  except  that  the  company  shall  not  maintain  or 
operate  any  railroad  or  canal  in  the  state  of  New  Jersey. 


208  MODERN   BUSINESS    CORPORATIONS. 

To  apply  for,  obtain,  register,  purchase,  lease  or  otherwise  to 
acquire,  and  to  hold,  use,  own,  operate  and  introduce,  and  to  sell, 
assign  or  otherwise  to  dispose  of,  any  trade-marks,  trade-names, 
patents,  inventions,  improvements,  and  processes  used  in  connection 
with  or  secured  under  letters  patent  of  the  United  States,  or  else- 
where or  otherwise,  and  to  use,  exercise,  develop,  grant  licenses  in 
respect  of,  or  otherwise  to  turn  to  account  any  such  trade-marks, 
patents,  licenses,  processes  and  the  like,  or  any  such  property  or 
rights. 

To  engage  in  any  other  manufacturing,  mining,  construction  or 
transportation  business  of  any  kind  or  character  whatsoever,  and 
to  that  end  to  acquire,  hold,  own  and  dispose  of  any  and  all  property, 
assets,  stocks,  bonds  and  rights  of  any  and  every  kind,  but  not  to 
engage  in  any  business  hereunder  which  shall  require  the  exercise 
of  the  right  of  eminent  domain  within  the  state  of  New  Jersey. 

To  acquire  by  purchase,  subscription  or  otherwise,  and  to  hold  or 
to  dispose  of  stocks,  bonds  or  any  other  obligations  of  any  corpora- 
tion formed  for,  or  then  6r  theretofore  engaged  in  or  pursuing,  any 
one  or  more  of  the  kinds  of  business,  purposes,  objects  or  operations 
above  indicated,  or  owning  or  holding  any  property  of  any  kind  here- 
in mentioned,  or  of  any  corporation  owning  or  holding  the  stocks 
or  the  obligations  of  any  such  corporation. 

To  hold  for  investment,  or  otherwise  to  use,  sell  or  dispose  of, 
any  stock,  bonds  or  other  obligations  of  any  such  other  corporation; 
to  aid  in  any  manner  any  corporation  whose  stock,  bonds,  or  other 
obligations  are  held  or  in  any  manner  guaranteed  by  the  company, 
and  to  do  any  other  acts  or  things  for  the  preservation,  protection, 
improvement  or  enhancement  of  the  value  of  any  such  stock,  bonds 
or  other  obligations,  or  to  do  any  acts  or  things  designed  for  any 
such  purpose;  and  while  owner  of  any  such  stock,  bonds  or  other 
obligations,  to  exercise  all  the  rights,  powers  and  privileges  of  own- 
ership thereof,  and  to  exercise  any  and  all  voting  power  thereon. 

The  business  or  purpose  of  the  company  is  from  time  to  time  to 
do  any  one  or  more  of  the  acts  and  things  herein  set  forth;  and 
it  may  conduct  its  business  in  other  states,  and  in  territories,  and 
in  foreign  countries,  and  may  have  one  office,  or  more  than  one 
office,  and  keep  the  books  of  the  company  outside  of  the  state  of 
New  Jersey,  except  as  otherwise  may  be  provided  by  law;  and  may 
hold,  purchase,  mortgage  and  convey  real  and  personal  property, 
either  in  or  out  of  the  state  of  New  Jersey. 

Without  in  any  particular  limiting  any  of  the  objects  and  powers 
of  the  corporation,  it  is  hereby  expressly  declared  and  provided  that 
the  corporation  shall  have  power  to  issue  bonds  and  other  obliga- 
tions in  payment  for  property  purchased  or  acquired  by  it,  or  for 


FORMS.  209 

any  other  object  in  or  about  its  business;  to  mortgage  or  pledge 
any  stocks,  bonds  or  other  obligations,  or  any  property  which  may 
be  acquired  by  it,  to  secure  any  bonds  or  other  obligations  by  it 
issued  or  incurred;  to  guarantee  any  dividends,  or  bonds,  or  con- 
tracts, or  other  obligations;  to  make  and  perform  contracts  of  anj 
kind  and  description  and  in  carrying  on  its  business  or  for  the  pur- 
pose of  attaining  or  furthering  any  of  its  objects,  to  do  any  and  all 
other  acts  and  things,  and  to  exercise  any  and  all  other  powers 
which  a  co-partnership  or  natural  person  could  do  and  exercise,  and 
which  now  or  hereafter  may  be  authorized  by  law. 

IV.  The  total  authorized  capital  stock  of  the  corporation  is  eleven 
hundred  million  dollars  ($1,100,000,000),  divided  into  eleven  mil- 
lion shares  of  the  par  value  of  one  hundred  dollars  each.  Of  such 
total  authorized  capital  stock,  five  million  five  hundred  thousand 
shares,  amounting  to  five  hundred  and  fifty  million  dollars,  shall  be 
preferred  stock,  and  five  million  five  hundred  thousand  shares, 
amounting  to  five  hundred  and  fifty  million  dollars,  shall  be  common 
stock. 

From  time  to  time,  the  preferred  stock  and  the  common  stock, 
may  be  increased  according  to  law  and  may  be  issued  in  such 
amounts  and  proportions  as  shall  be  determined  by  the  board  of 
directors,  and  as  may  be  permitted  by  law. 

The  holders  of  the  preferred  stock  shall  be  entitled  to  receive, 
when  and  as  declared,  from  the  surplus  or  net  profits  of  the  corpora- 
tion, yearly  dividends  at  the  rate  of  seven  per  centum  per  annum, 
and  no  more,  payable  quarterly  on  dates  to  be  fixed  by  the  by-laws. 
The  dividends  on  the  preferred  stock  shall  be  cumulative,  and  shall 
be  payable  before  any  dividend  on  the  common  stock  shall  be  paid 
or  set  apart;  so  that,  if  in  any  year  dividends  amounting  to  seven 
per  cent,  shall  not  have  been  paid  thereon,  the  deficiency  shall  be 
payable  before  any  dividends  shall  be  paid  upon  or  set  apart  for 
the  common  stock. 

Whenever  all  cumulative  dividends  on  the  preferred  stock  for  all 
previous  years  shall  have  been  declared,  and  shall  have  become 
payable,  and  the  accrued  quarterly  instalments  for  the  current 
year  shall  have  been  declared  and  the  company  shall  have  paid 
such  cumulative  dividends  for  previous  years,  and  such  accrued 
quarterly  instalments,  or  shall  have  set  aside  from  its  surplus  or 
net  profits  a  sum  sufficient  for  the  payment  thereof,  the  board  of 
directors  may  declare  dividends  on  the  common  stock,  payable  then 
or  thereafter  out  of  any  remaining  surplus  or  net  profits. 

In  the  event  of  any  liquidation  or  dissolution  or  winding  up 
(whether  voluntary  or  involuntary)  of  the  corporation  the  holders 

MOD.  Bus.  CORP.— 14 


210  MODERN   BUSINESS    CORPORATIONS. 

of  the  preferred  stock  shall  be  entitled  to  be  paid  in  full  both  the 
par  amount  of  their  shares  and  the  unpaid  dividends  accrued  there- 
on, before  any  amount  shall  be  paid  to  the  holders  of  the  common 
stock;  and  after  the  payment  to  the  holders  of  the  preferred  stock 
of  its  par  value,  and  the  unpaid  accrued  dividends  thereon,  the  re- 
maining assets  and  funds  shall  be  divided  and  paid  to  the  holders 
of  the  common  stock  according  to  their  respective  shares. 

V.  The  names  and  postoffice  addresses  of  the  incorporators,  and 
the  number  of  shares  and  of  stock  for  which  severally  and  respec- 
tively we  do  hereby  subscribe  (the  aggregate  of  our  said  subscrip- 
tions being  three  thousand  dollars,  is  the  amount  of  the  capital 
stock  with  which  the  corporation  will  commence  business)  are  as 
follows : 

(Here  follow  the  names  and  postoffice  addresses  of  each  of  the  in- 
corporators, and  the  number  of  shares  of  stock  subscribed  for  by 
each.) 

VI.  The  duration  of  the  corporation  shall  be  perpetual. 

VII.  The  number  of  directors  of  the  company  shall  be  fixed  from 
time  to  time  by  the  by-laws;  but  the  number,  if  fixed  at  more  than 
three,  shall  be  some  multiple  of  three.    The  directors  shall  be  classi- 
fied with  respect  to  the  time  for  which  they  shall  severally  hold 
office  by  dividing  them  into  three  classes,  each  consisting  of  one- 
third  of  the  whole  number  of  the  board  of  directors.    The  directors 
of  the  first  class  shall  be  elected  for  a  term  of  one  year;  the  direc- 
tors of  the  second  class  for  a  term  of  two  years;  and  the  directors 
of  the  third  class  for  a  term  of  three  years;  and  at  each  annual 
election  the  successors  to  the  class  of  directors  whose  terms  shall 
expire  in  that  year  shall  be  elected  to  hold  office  for  the  term  of 
three  years,  so  that  the  term  of  office  of  one  class  of  directors  shall 
expire  in  each  year. 

The  number  of  the  directors  may  be  increased  as  may  be  pro- 
vided in  the  by-laws.  In  the  case  of  any  increase  of  the  number 
of  the  directors  the  additional  directors  shall  be  elected  as  may  be 
provided  in  the  by-laws  by  the  directors  or  by  the  stockholders  at 
an  annual  or  special  meeting;  and  one-third  of  their  number  shall 
be  elected  for  the  then  unexpired  portion  of  the  term  of  the  directors 
of  the  first  class,  one-third  of  their  number  for  the  unexpired  por- 
tion of  the  term  of  the  directors  of  the  third  class,  so  that  each 
class  of  directors  shall  be  increased  equally. 

In  case  of  any  vacancy  in  any  class  of  directors  through  death, 
resignation,  disqualification  or  other  cause,  the  remaining  directors, 
by  affirmative  vote  of  a  majority  of  the  board  of  directors,  may  elect 
a  successor  to  hold  office  for  the  unexpired  portion  of  the  term  of 


FORMS.  211 

the  director  whose  place  shall  be  vacant,  and  until  the  election  of  a 
successor. 

The  board  of  directors  shall  have  power  to  hold  their  meetings 
outside  of  the  state  of  New  Jersey  at  such  places  as  from  time  to- 
time  may  be  designated  by  the  by-laws  or  by  resolution  of  the 
board.  The  by-laws  may  prescribe  the  number  of  directors  neces- 
sary to  constitute  a  quorum  of  the  board  of  directors,  which  num- 
ber may  be  less  than  a  majority  of  the  whole  number  of  the  direc- 
tors. 

Unless  authorized  by  votes  given  in  person  or  by  proxy  by  stock- 
holders holding  at  least  two-thirds  of  the  capital  stock  of  the  cor- 
poration, which  is  represented  and  voted  upon  in  person  or  by 
proxy  at  a  meeting  specially  called  for  that  purpose,  or  at  an  an- 
nual meeting,  the  board  of  directors  shall  not  mortgage  or  pledge 
any  of  its  real  property,  or  any  shares  of  the  capital  stock  of  any 
other  corporation;  but  this  prohibition  shall  not  be  construed  to 
apply  to  the  execution  of  any  purchase-money  mortgage  or  any  other 
purchase-money  lien. 

As  authorized  by  the  act  of  the  legislature  of  the  state  of  New 
Jersey,  passed  March  22,  1901,  amending  the  seventeenth  section  of 
the  act  concerning  corporations  (Revision  of  1896);  any  action 
which  theretofore  required  the  consent  of  the  holders  of  two-thirds 
of  the  stock  at  any  meeting,  after  due  notice  to  them  given,  or  re- 
quired their  consent  in  writing  to  be  filed,  may  be  taken  upon  the 
consent  of  and  the  consent  given  and  filed  by  the  holders  of  two- 
thirds  of  the  stock  of  each  class  represented  at  such  meeting  in 
person  or  by  proxy. 

Any  officer  elected  or  appointed  by  the  board  of  directors  may  be 
removed  at  any  time  by  the  affirmative  vote  of  a  majority  of  the, 
whole  board  of  directors. 

Any  other  officer  or  employe  of  the  company  may  be  removed  at 
any  time  by  vote  of  the  board  of  directors,  or  by  any  committee  or 
superior  officer  upon  whom  such  power  of  removal  may  be  con- 
ferred by  the  by-laws  or  by  vote  of  the  board  of  directors. 

The  board  of  directors  by  the  affirmative  vote  of  a  majority  of  the 
whole  board,  may  appoint  from  the  directors  an  executive  commit- 
tee, of  which  a  majority  shall  constitute  a  quorum;  and,  to  such 
extent  as  shall  be  provided  by  the  by-laws,  such  committee  shall 
have  and  may  exercise  all  or  any  of  the  powers  of  the  board  of  di- 
rectors, including  power  to  cause  the  seal  of  the  corporation  to  be 
affixed  to  all  papers  that  may  require  it. 

The  board  of  directors,  by  the  affirmative  vote  of  a  majority  of 
the  whole  board,  may  appoint  any  other  standing  committees,  and 


212  MODERN   BUSINESS    CORPORATIONS. 

such  standing  committees  shall  have  and  may  exercise  such  pow- 
ers as  shall  be  conferred  or  authorized  by  the  by-laws. 

The  board  of  directors  may  appoint  not  only  other  officers  of  the 
company,  but  also  one  or  more  vice-presidents,  one  or  more  assist- 
ant treasurers,  and  one  or  more  assistant  secretaries;  and,  to  the' 
extent  provided  in  the  by-laws,  the  persons  so  appointed  respectively 
shall  have  and  may  exercise  all  the  powers  of  the  president,  of  the 
treasurer  and  of  the  secretary  respectively. 

The  board  of  directors  shall  have  power  from  time  to  time  to  fix 
and  to  determine  and  to  vary  the  amount  of  the  working  capital  of 
the  company;  and  to  direct  and  determine  the  use  and  disposition 
of  any  surplus  or  net  profits  over  and  above  the  capital  stock  paid 
in;  and  in  its  discretion  the  board  of  directors  may  use  and  apply 
any  such  surplus  or  accumulated  profits  in  purchasing  or  acquiring 
its  bonds  or  other  obligations,  or  shares  of  its  own  capital  stock, 
to  such  extent  and  in  such  manner  and  upon  such  terms  as  the 
board  of  directors  shall  deem  expedient;  but  shares  of  such  capital 
stock  so  purchased  or  acquired  may  be  resold,  unless  such  shares 
shall  have  been  retired  for  the  purpose  of  decreasing  the  company's 
stock  as  provided  by  law. 

The  board  of  directors  shall  from  time  to  time  determine  whether 
and  to  what  extent,  and  at  what  times  and  places,  and  under  what 
conditions  and  regulations,  the  accounts  and  books  of  the  corpora- 
tion, or  any  of  them  shall  be  open  to  the  inspection  of  the  stock- 
holders, and  no  stockholders  shall  have  any  right  to  inspect  any 
account  or  book  or  document  of  the  corporation,  except  as  conferred 
by  statute  or  authorized  by  the  board  of  directors  or  by  a  resolution 
of  the  stockholders. 

Subject  always  to  by-laws  made  by  the  stockholders,  the  board  of 
directors  may  make  by-laws,  and,  from  time  to  time,  may  alter, 
amend  or  repeal  any  by-laws;  but  any  by-laws  made  by  the  board  of 
directors  may  be  altered  or  repealed  by  the  stockholders  at  any  an- 
nual meeting,  or  at  any  special  meeting,  provided  notice  of  such 
proposed  alteration  or  repeal  be  included  in  the  notice  of  the  meet- 
ing. 

IN  WITNESS  WHEREOF,  we  have  hereunto  set  our  hands  and  seals 
this  23d  day  of  February,  1901. 

(Signatures  of  Incorporators.) 
( Acknowledgment. ) 

The  written  assent  and  signatures  of  all  the  incorporators  and 
stockholders  of  the  said  United  States  Steel  Corporation  to  the  fore- 
going amendments  and  changes  is  hereto  appended. 

IN  WITNESS  WHEREOF,  the  said  United  States  Steel  Corporation 
has  caused  the  certificate  to  be  signed  by  its  president  and  its  secre- 


FORMS.  213 

tary,  and  its  corporate  seal  is  hereto  affixed,  this  first  day  of  April, 
1901. 

(Signatures  of  President  and  Secretary,  and  corporate  seal.) 

( Acknowledgment. ) 

We,  the  undersigned,  being  all  the  incorporators  and  stockholders 
of  the  United  States  Steel  Corporation,  having  at  a  meeting  regu- 
larly called  for  that  purpose,  voted  in  favor  of  the  changes  and 
amendments  set  forth  in  the  above  certificate,  do  now,  pursuant  to 
law,  hereby  give  our  written  consent  to  the  said  changes  and  alter- 
ations. 

Witness  our  hands  this  1st  day  of  April,  A.  D.  1901. 
(Here   follow   signatures   of   incorporators   and   stockholders.) 
( Acknowledgment. ) 


Form  11.    By-Laws — Simple  Form. 

ARTICLE  I. 
STOCKHOLDERS. 

SECTION  I.  Stockholders'  meetings  shall  be  held  at  the  principal 
office  or  place  of  business  of  this  company. 

SECTION  II.  The  annual  meeting  of  the  stockholders  of  this  com- 
pany shall  be  held  on  the  second  Tuesday  in  January  of  each  year  at 
twelve  o'clock,  noon. 

SECTION  III.  A  notice  of  such  meeting,  written  or  printed  shall  be 
mailed  to  each  stockholder  at  his  postoffice  address  appearing  upon 
the  records  of  the  company,  ten  days  before  each  annual  or  special 
meeting  of  the  stockholders,  which  notice,  in  case  of  a  special  meet- 
ing, shall  state  the  object  or  objects  for  which  it  is  called.  Special 
meetings  of  the  stockholders  may  be  called  by  a  like  notice  at  any 
time  by  the  president  or  by  stockholders  owning  ten  per  cent,  of  the 
entire  capital  stock,  whose  names  shall  be  signed  to  the  notices  of 
such  meeting.  No  business  shall  be  transacted  at  a  special  meeting 
except  as  stated  in  the  notice  sent  to  stockholders,  unless  by  the 
unanimous  consent  of  all  stockholders,  either  in  person  or  by  proxy, 
all  such  stock  being  represented  at  the  meeting. 

SECTION  IV.  Upon  failure  to  hold  any  annual  meetings  as  herein 
provided,  such  meeting  may  be  called  by  the  president  or  by  the 
holders  of  ten  per  cent,  of  the  capital  stock,  in  the  same  manner  as 
a  special  meeting. 

SECTION  V.  At  any  meeting  of  the  stockholders  a  quorum  for  the 
transaction  of  business  shall  consist  of  a  majority  of  the  voting 
stock  of  the  company  represented  by  the  stockholders  in  person  or 
by  proxy. 


214:  MODERN   BUSINESS   CORPORATIONS. 

SECTION  VI.  Directors  to  manage  the  business  of  the  corporation 
shall  be  elected  at  the  annual  meeting  of  the  stockholders,  which 
election  shall  be  by  ballot  and  shall  be  conducted  by  two  inspectors 
appointed  by  the  president  for  that  purpose. 

SECTION  VII.  At  all  stockholders'  meeting,  when  questions  are 
voted  upon,  each  stockholder  or  his  proxy  may  cast  one  vote  for 
each  share  of  stock  owned  by  him. 

SECTION  VIII.  All  proxies  shall  be  in  writing  and  properly  signed. 
Proxies  shall  not  be  granted  for  a  longer  period  than  six  months. 

SECTION  IX.  The  president  shall  call  each  meeting  of  stockholders 
together,  when  they  shall  choose  a  chairman  to  preside  over  their 
meeting.  The  secretary  of  the  company,  or  in  his  absence  the  secre- 
tary appointed  by  such  chairman,  shall  keep  a  faithful  record  of 
the  proceedings  of  all  stockholders'  meetings. 

SECTION  X.  In  case  of  any  tie  vote  on  an  affirmative  proposition, 
the  motion  shall  be  deemed  to  have  been  lost.  No  action  shall  be 
taken  by  virtue  of  any  vote  at  a  stockholders'  meeting  unless  car- 
ried by  a  majority  vote. 

SECTION  XI.  The  following  order  of  business  shall  be  observed  at 
all  annual  and  special  meetings  of  the  stockholders  so  far  as  practi- 
cable. 

1.  Ascertaining  that  a  quorum  is  present. 

2.  Reading,  correction  and  approval  of  minutes  of  previous  meet- 
ings. 

3.  Reports  of  president,  treasurer  and  secretary,  respectively. 

4.  Reports  of  committees. 

5.  Election  of  directors. 

6.  Unfinished  business. 

7.  New  business. 

ARTICLE  II. 

STOCK. 

SECTION  I.  Certificates  of  stock  shall  be  in  a  form  adopted  by  the 
board  of  directors  and  shall  be  signed  by  the  president  or  vice-presi- 
dent and  the  treasurer  and  attested  by  the  corporate  seal. 

SECTION  II.  Certificates  of  stock  shall  be  issued  in  numerical  or- 
der from  the  stock  certificate  book  and  the  certificates  shall  be  num- 
bered consecutively.  Certificates  as  issued  shall  be  taken  from  a 
stub  book  and  a  full  record  of  each  entered  on  the  corresponding 
stub. 

SECTION  III.  All  certificates  of  stock  transferred  by  indorsement 
thereon  shall  be  surrendered  for  cancellation  and  new  certificates 
issued  to  the  purchasers  or  assignees.  All  surrendered  certificates 


FORMS.  215 

shall  be  indorsed  with  the  date  of  cancellation  and  pasted  to  the 
corresponding  stubs  in  the  stock  book. 

SECTION  IV.  Transfers  of  stock  may  only  be  made  upon  the  books 
of  the  company  and  no  transfers  shall  be  entered  except  upon  the 
surrender  of  the  certificate  representing  the  transferred  stock,  prop- 
erly indorsed.  No  transfers  of  stock  shall  be  made  within  twenty 
days  before  a  general  election  nor  within  ten  days  before  the  pay- 
ment of  a  dividend. 

SECTION  V.  The  board  of  directors  may  issue  duplicate  certificates 
of  stock  upon  proof  that  any  such  certificates  have  been  lost  or  de- 
stroyed, taking  a  satisfactory  bond  of  indemnity  against  any  loss 
or  claims  that  the  company  may  incur  by  reason  of  issuing  such 
duplicate  certificates.  But  the  board  of  directors  may  impose 
additional  conditions  before  issuing  such  certificates  and  shall  not 
be  compelled  to  issue  any  duplicate  certificates  except  upon  the 
order  of  a  court  of  competent  jurisdiction. 

SECTION  VI.  All  stock  of  the  company  which  may  be  donated  to, 
or  purchased  by  the  company,  shall  be  held  subject  to  disposal  by 
the  action  of  the  board  of  directors.  It  shall  neither  vote  nor  par- 
ticipate in  dividends  while  so  held. 

ARTICLE  III. 

DIRECTORS  AND  OFFICERS. 

SECTION  I.  A  board  of  nine  directors  shall  be  chosen  annually  by 
the  stockholders  at  their  annual  meeting,  who  shall  constitute  a 
governing  board  to  manage  the  affairs  of  the  company.  And  no 
person  shall  be  elected  nor  serve  as  a  director  unless  he  shall  own 
at  least  one  share  of  stock  in  the  company  at  the  time  of  his  elec- 
tion and  continuously  during  his  term  of  office. 

SECTION  II.  All  elections  for  directors  shall  be  by  ballot.  The 
polls  shall  be  open  for  at  least  one  hour  between  the  hours  of  1:00 
and  9 : 00  o'clock  p.  M. 

SECTION  III.  Vacancies  in  the  board  of  directors  by  reason  of 
death,  resignation  or  other  cause  shall  be  filled  by  the  remaining 
directors  choosing  from  among  the  stockholders  a  director  to  fill 
the  unexpired  term. 

SECTION  IV.  In  case  of  the  death,  resignation,  or  disqualification 
of  the  entire  board  of  directors  a  new  board  may  be  elected  for  the 
unexpired  term  at  a  special  meeting  of  the  stockholders  called  for 
that  purpose. 

SECTION  V.  Resignations  of  directors  shall  be  in  writing  addressed 
to  the  board. 

SECTION  VI.   Any  director  may  be  removed  from  office  for  fraud, 


216  MODERN   BUSINESS   CORPORATIONS. 

crime  or  misconduct  in  office  by  an  affirmative  vote  of  six  directors, 
in  which  case  the  vacancy  shall  be  filled  by  the  board. 

SECTION  VII.  The  board  of  directors  shall  hold  a  meeting  at  the 
principal  office  of  the  company  on  the  first  Monday  in  each  month 
and  at  other  times  on  the  call  of  the  president  or  vice-president  or 
of  three  members  of  the  board. 

SECTION  VIII.  The  board  of  directors  may  adopt  rules  and  regu- 
lations for  the  calling  and  conduct  of  meetings  of  the  board  and 
the  management  of  the  affairs  of  the  company  not  inconsistent  with 
law  nor  with  these  by-laws. 

SECTION  IX.  At  the  first  meeting  of  the  board  of  directors  each 
year,  following  the  election  of  directors  at  the  annual  stockholders 
meeting,  the  board  of  directors  shall  choose  a  president,  vice-presi- 
dent, secretary  and  treasurer,  who  shall  serve  for  one  year  and 
until  their  successors  are  elected  and  qualified.  The  president  and 
vice-president  shall  be  members  of  the  board  of  directors.  The  same 
person  may  be  elected  to  two  of  such  offices. 

SECTION  X.  The  salaries  of  all  officers  shall  be  fixed  by  the  board 
of  directors,  and  may  be  changed  from  time  to  time  by  a  majority 
vote  of  the  board. 

SECTION  XI.  The  president  shall  preside  at  all  meetings  and  join 
with  the  secretary  in  executing  all  instruments  of  writing,  requir- 
ing formal  execution  on  the  part  of  the  company.  He  shall  perform 
such  other  duties  as  are  assigned  him  by  the  board  of  directors. 
The  vice-president  shall  perform  the  duties  and  exercise  the  powers 
of  the  president  in  case  of  his  absence  or  disability. 

SECTION  XII.  The  treasurer  shall  give  a  bond  for  the  faithful 
performance  of  his  duties  in  such  sum  and  with  such  sureties  as 
may  be  required  by  the  board  of  directors.  He  shall  have  charge 
and  custody  of  the  funds  of  the  company,  subject  to  such  regula- 
tion as  to  keeping  them  in  a  bank  or  trust  company,  and  counter- 
signing checks,  as  the  board  of  directors  may  impose.  He  shall  keep 
such  books  and  account  and  make  such  reports  as  may  be  required 
by  the  board  of  directors. 

SECTION  XIII.  The  secretary  shall  keep  a  faithful  record  of  the 
proceedings  of  all  corporation  meetings.  He  shall  have  charge  of 
the  corporation  seal  and  of  its  stock  and  transfer  books,  and  shall 
affix  the  seal  to  such  instruments  as  are  required  by  the  board  of 
directors,  and  make  transfers  of  stock  upon  proper  request,  as  pro- 
vided by  law  and  these  by-laws.  He  shall  keep  such  other  books 
and  perform  such  duties  as  the  board  of  directors  may  prescribe. 


OF  THE 

'««"TY 

V'. 

ARTICLE  17. 

SEAL. 

SECTION  I.  The  seal  of  the  company  shall  consist  of  two  metal 
discs,  with  the  name  of  the  company in  circu- 
lar form  about  the  outer  edge  and  the  words  "Corporation  Seal, 
New  York,"  in  the  center  thereof,  so  mounted  as  to  be  capable  of 
impressing  said  words  on  paper  in  raised  letters. 

ARTICLE  V. 

DIVIDENDS. 

SECTION  I.  Dividends  shall  be  declared  annually,  or  oftener,  as 
determined  by  the  board  of  directors.  The  board  of  directors  may, 
from  time  to  time,  transfer  any  part  of  the  earnings  of  the  company 
to  a  surplus  fund,  but  no  part  of  the  net  earnings  of  any  year  shall 
be  set  aside  as  surplus  until  after  the  payment  of  a  dividend  of  at 
least  four  (4)  per  cent,  upon  the  capital  stock,  out  of  the  net 
profits. 

ARTICLE  VI. 

AMENDMENTS. 

SECTION  I.  These  by-laws  may  be  amended,  repealed  or  altered 
at  any  regular  meeting  of  the  stockholders  or  at  any  special  meet- 
ing called  for  that  purpose  upon  due  notice  of  its  object  by  a  major- 
ity vote  of  the  stock  represented  at  such  meeting. 

SECTION  II.  The  board  of  directors  may  suspend  the  effect  of  any 
by-law  and  enact  a  substitute  therefor,  to  be  effective  until  the 
proposed  amendment,  repeal,  or  alteration  shall  be  submitted  to  a 
stockholders'  meeting,  if  two-thirds  of  all  the  directors  shall  vote 
in  favor  of  such  action. 

SECTION  III.  The  board  of  directors  may  enact  any  additional  by- 
laws not  inconsistent  with  law  or  the  by-laws  adopted  by  the  stock- 
holders. 


Form  12.    By-Laws  of  United  States  Steel  Corporation. 
ARTICLE  I. 

STOCKHOLDERS. 

SECTION  1.  Annual  Meeting.  A  meeting  of  the  stockholders  of 
the  company  shall  be  held  annually  at  the  principal  office  of  the 
company  in  the  state  of  New  Jersey  at  twelve  o'clock  noon  on  the 


218  MODERN   BUSINESS   CORPORATIONS. 

third  Monday  in  February  in  each  year,  if  not  a  legal  holiday,  and 
if  a  legal  holiday,  then  on  the  next  succeeding  Monday  not  a  legal 
holiday,  for  the  purpose  of  electing  directors,  and  for  the  transac- 
tion of  such  other  business  as  may  be  brought  before  the  meeting. 

It  shall  be  the  duty  of  the  secretary  to  cause  notice  of  each  an- 
nual meeting  to  be  published  once  in  each  of  the  four  calendar 
weeks  next  preceding  the  meeting  in  at  least  one  newspaper  in 
each  of  the  following  places:  Jersey  City,  N.  J.;  New  York,  N.  Y.; 
Chicago,  111.,  and  Pittsburg,  Pa.  Nevertheless,  a  failure  to  publish 
such  notice,  or  any  irregularity  in  such  notice,  or  in  the  publication 
thereof,  shall  not  affect  the  validity  of  any  annual  meeting,  or  any 
proceedings  at  any  such  meeting. 

SECTION  2.  Special  meetings.  Special  meetings  of  the  stock- 
holders may  be  held  at  the  principal  office  of  the  company  in  the 
state  of  New  Jersey,  whenever  called  in  writing,  or  by  a  vote,  by  a 
majority  of  the  board  of  directors. 

Notice  of  each  special  meeting,  indicating  briefly  the  object  or 
objects  thereof,  shall,  by  the  secretary,  be  published  once  in  each 
of  the  four  calendar  weeks  next  preceding  the  meeting  in  at  least 
one  newspaper  in  each  of  the  following  places:  Jersey  City,  N.  J.; 
New  York,  N.  Y.;  Chicago,  111.,  and  Pittsburg,  Pa.  Nevertheless,  if 
all  the  stockholders  shall  waive  notice  of  a  special  meeting,  no 
notice  of  such  meeting  shall  be  required;  and  whenever  all  the 
stockholders  shall  meet  in  person  or  by  proxy,  such  meeting  shall 
be  valid  for  all  purposes  without  call  or  notice,  and  at  such  meeting 
any  corporate  action  may  be  taken. 

SECTION  3.  Quorum.  At  any  meeting  of  the  stockholders  the 
holders  of  one-third  of  all  the  shares  of  the  capital  stock  of  the 
company,  present  in  person  or  represented  by  proxy,  shall  consti- 
tute a  quorum  of  the  stockholders  for  all  purposes,  unless  the  rep- 
resentation of  a  larger  number  shall  be  required  by  law,  and,  in 
that  case,  the  representation  of  the  number  so  required  shall  con- 
stitute a  quorum. 

If  the  holders  of  the  amount  of  stock  necessary  to  constitute  a 
quorum  shall  fail  to  attend  in  person  or  by  proxy  at  the  time  and 
place  fixed  by  these  by-laws  for  an  annual  meeting,  or  fixed  by  no- 
tice as  above  provided  for  a  special  meeting,  called  by  the  directors, 
a  majority  in  interest  of  the  stockholders  present  in  person  or  by 
proxy  may  adjourn,  from  time  to  time,  without  notice  other  than 
by  announcement  at  the  meeting,  until  holders  of  the  amount  of 
stock  requisite  to  constitute  a  quorum  shall  attend.  At  any  such 
adjourned  meeting  at  which  a  quorum  shall  be  present  any  business 
may  be  transacted  which  might  have  been  transacted  at  the  meet- 
ing as  originally  notified. 


FORMS.  219 

SECTION  4.  Organization.  The  president,  and  in  his  absence  the 
chairman  of  the  executive  committee,  shall  call  meetings  of  the 
stockholders  to  order,  and  shall  act  as  chairman  of  such  meetings. 
The  board  of  directors  may  appoint  any  stockholder  to  act  as 
chairman  of  any  meetings  in  the  absence  of  the  president  and  of 
the  chairman  of  the  executive  committee. 

The  secretary  of  the  company  shall  act  as  secretary  at  all  meet- 
ings of  the  stockholders;  but  in  the  absence  of  the  secretary  at 
any  meeting  of  the  stockholders  the  presiding  officer  may  appoint 
any  person  to  act  as  secretary  of  the  meeting. 

SECTION  5.  Voting.  At  each  meeting  of  the  stockholders  every 
stockholder  shall  be  entitled  to  vote  in  person,  or  by  proxy  ap- 
pointed by  instrument  in  writing,  subscribed  by  such  stockholder 
or  by  his  duly  authorized  attorney,  and  delivered  to  the  inspectors 
at  the  meeting;  and  he  shall  have  one  vote  for  each  share  of  stock 
standing  registered  in  his  name  at  the  time  of  the  closing  of  the 
transfer  books  for  said  meeting.  The  votes  for  directors,  and,  upon 
demand  of  any  stockholder,  the  votes  upon  any  question  before 
the  meeting,  shall  be  by  ballot. 

At  each  meeting  of  the  stockholders  a  full,  true  and  complete 
list,  in  alphabetical  order,  of  all  the  stockholders  entitled  to  vote 
at  such  meeting,  and  indicating  the  number  of  shares  held  by 
each,  certified  by  the  secretary  or  by  the  treasurer,  shall  be  fur- 
nished. Only  the  person  in  whose  names  shares  of  stock  stand  on 
the  books  of  the  company  at  the  time  of  the  closing  of  the  transfer 
books  for  such  meeting,  as  evidenced  by  the  list  of  stockholders  so 
furnished,  shall  be  entitled  to  vote  in  person  or  by  proxy  on  the 
shares  so  standing  in  their  names. 

Prior  to  any  meeting,  but  subsequent  to  the  time  of  closing  the 
transfer  books  for  such  meeting,  any  proxy  may  submit  his  powers 
of  attorney  to  the  secretary,  or  to  the  treasurer,  for  examination. 
The  certificate  of  the  secretary,  or  of  the  treasurer,  as  to  the  regu- 
larity of  such  powers  of  attorney,  and  as  to  the  number  of  shares 
held  by  the  persons  who  severally  and  respectively  executed  such 
powers  of  attorney  shall  be  received  as  prima  facie  evidence  of  the 
number  of  shares  represented  by  the  holder  of  such  powers  of  at- 
torney for  the  purpose  of  establishing  the  presence  of  a  quorum  at 
such  meeting,  and  of  organizing  the  same  and  for  all  other  pur- 
poses. 

SECTION  6.  Inspectors.  At  each  meeting  of  the  stockholders  the 
polls  shall  be  opened  and  closed;  the  proxies  and  ballots  shall  be 
received  and  be  taken  in  charge,  and  all  questions  touching  the 
qualification  of  voters  and  the  validity  of  proxies,  and  the  accept- 
ance or  rejection  of  votes,  shall  be  decided  by  three  inspectors. 


220  MODERN    BUSINESS    CORPORATIONS. 

Such  inspectors  shall  be  appointed  by  the  board  of  directors  be- 
fore or  at  the  meeting,  or,  if  no  such  appointment  shall  have  been 
made,  then  by  the  presiding  officer  at  the  meeting.  If  for  any  rea- 
son any  of  the  inspectors  previously  appointed  shall  fail  to  attend 
or  refuse  or  be  unable  to  serve,  inspectors  in  place  of  any  so  failing 
to  attend,  or  refusing  or  unable  to  attend,  shall  be  appointed  in  like 
manner. 

ARTICLE  II. 

BOARD    OF    DIRECTORS. 

SECTION  1.  Number,  classification  and  term  of  office.  The  business 
and  the  property  of  the  company  shall  be  managed  and  controlled 
by  the  board  of  directors. 

As  provided  in  the  certificate  of  incorporation,  the  directors  shall 
be  classified  in  respect  of  the  time  for  which  they  shall  severally 
hold  office,  by  dividing  them  into  three  classes,  each  class  consist- 
ing of  one-third  of  the  whole  number  of  the  board  of  directors. 
The  directors  of  the  first  class  shall  be  elected  for  a  term  of  one 
year;  the  directors  of  the  second  class  shall  be  elected  for  a  term 
of  two  years;  the' directors  of  the  third  class  shall  be  elected  for  a 
term  of  three  years.  At  each  annual  election  the  successors  to 
the  directors  of  the  class  whose  terms  shall  expire  in  that  year 
shall  be  elected  to  hold  office  for  the  term  of  three  years,  so  that 
the  term  of  office  of  one  class  of  directors  shall  expire  in  each 
year. 

The  number  of  directors  shall  be  twenty-four,  but  the  number  of 
directors  may  be  altered  from  time  to  time  by  the  alteration  of 
these  by-laws.* 

In  case  of  any  increase  of  the  number  of  directors,  the  additional 
directors  shall  be  elected  by  the  directors  then  in  office;  one-third 
of  such  additional  directors  for  the  unexpired  portion  of  the  term 
of  one  year;  one-third  for  the  unexpired  portion  of  the  term  of 
two  years,  and  one-third  for  the  unexpired  portion  of  the  term  of 
three  years,  so  that  each  class  of  directors  shall  be  increased 
equally. 

Every  director  shall  be  a  holder  of  at  least  one  share  of  the 
capital  stock  of  the  company.  Each  director  shall  serve  for  the  term 
for  which  he  shall  have  been  elected,  and  until  his  successor  shall 
have  been  duly  chosen. 

At  all  elections  of  the  directors  the  polls  shall  remain  open  for 

*  In  states  where  the  number  of  directors  is  fixed  by  statute,  or 
where  the  statute  requires  that  the  number  be  fixed  by  the  articles 
of  incorporation,  this  clause  should  be  omitted. 


FORMS.  221 

at  least  one  hour,  unless  every  registered  owner  of  shares  has 
sooner  voted  in  person  or  by  proxy,  or  in  writing  has  waived  the 
statutory  provision. 

SECTION  2.  Vacancies.  In  case  of  any  vacancy  in  the  directors  of 
any  class  through  death,  resignation,  disqualification  or  other 
cause,  the  remaining  directors,  by  affirmative  vote  of  a  majority 
thereof,  may  elect  a  successor  to  hold  office  for  the  unexpired  por- 
tion of  the  term  of  the  director  whose  place  shall  be  vacant,  and 
until  the  election  of  his  successor. 

Such  vacancy  shall  be  filled  upon  and  after  nominations  therefor 
shall  have  been  made  by  the  finance  committee. 

SECTION  3.  Place  of  Meeting,  etc.  The  directors  may  hold  their 
meetings,  and  may  have  an  office  and  keep  the  books  of  the  com- 
pany (except  as  otherwise  may  be  provided  for  by  law)  in  such 
place  or  places  in  the  state  of  New  Jersey  or  outside  of  the  state 
of  New  Jersey  as  the  board  from  time  to  time  may  determine. 

SECTION  4.  Regular  Meetings.  Regular  meetings  of  the  board  of 
directors  shall  be  held  monthly  on  the  first  Tuesday  of  each  month, 
if  not  a  legal  holiday,  and  if  a  legal  holiday,  then  on  the  next  suc- 
ceeding Tuesday  not  a  legal  holiday.  No  notice  shall  be  required 
for  any  such  regular  monthly  meeting  of  the  board. 

SECTION  5.  Special  Meetings.  Special  meetings  of  the  board  of 
directors  shall  be  held  whenever  called  by  the  president,  or  by  one- 
third  of  the  directors  for  the  time  being  in  office. 

The  secretary  shall  give  notice  of  each  special  meeting  by  mail- 
ing the  same  at  least  two  days  before  the  meeting  or  by  telegraph- 
ing the  same  at  least  one  day  before  the  meeting  to  each  director; 
but  such  notice  may  be  waived  by  any  director.  At  any  meeting  at 
which  every  director  shall  be  present,  even  though  without  any 
notice,  any  business  may  be  transacted. 

SECTION  6.  Quorum.  A  majority  of  the  board  of  directors  shall 
constitute  a  quorum  for  the  transaction  of  business;  but,  if  at  any 
meeting  of  the  board,  there  be  less  than  a  quorum  present,  a  ma- 
jority of  those  present  may  adjourn  the  meeting  from  time  to  time. 

The  affirmative  vote  of  at  least  two-fifths  of  all  the  directors  for 
the  time  being  in  office  shall  be  necessary  for  the  passage  of  any 
resolution. 

SECTION  8.  Order  of  Business.  At  meetings  of  the  board  of  direct- 
ors business  shall  be  transacted  in  such  order  as,  from  time  to  time, 
the  board  may  determine  by  resolution. 

At  all  meetings  of  the  board  of  directors  the  president,  or  in  his 
absence,  the  chairman  of  the  executive  committee,  or  in  the  absence 
of  both  of  these  officers,  the  chairman  of  the  finance  committee 
shall  preside. 


222  MODERN   BUSINESS    CORPORATIONS. 

SECTION  9.  Contracts.  Inasmuch  as  the  directors  of  this  company 
are  men  of  large  and  diversified  business  interests,  and  are  likely 
to  be  connected  with  other  corporations  with  which  from  time  tc 
time  this  company  must  have  business  dealings,  no  contract  or  other 
transaction  between  this  company  and  any  other  corporation  shall 
be  affected  by  the  fact  that  directors  of  this  company  are  inter- 
ested in,  or  are  directors  or  officers  of,  such  other  corporation  if, 
at  the  meeting  of  the  board,  or  of  the  committee  of  this  company 
making,  authorizing  or  confirming  such  contract  or  transaction, 
there  shall  be  present  a  quorum  of  directors  not  so  interested;  and 
any  director  individually  may  be  a  party  to,  or  may  be  interested 
in,  any  contract  or  transaction  of  this  company,  providing  that 
such  contract  or  transaction  shall  be  approved  or  be  ratified  by  the 
affirmative  vote  of  at  least  ten  directors  not  so  interested. 

The  board  of  directors  in  its  discretion  may  submit  any  contract 
or  act  for  approval  or  ratification  at  any  annual  meeting  of  the 
stockholders,  or  at  any  meeting  of  the  stockholders  called  for  the 
purpose  of  considering  any  such  act  or  contract,  and  any  contract 
or  act  that  shall  be  approved  or  be  ratified  by  the  vote  of  the  holders 
of  a  majority  of  the  capital  stock  of  the  company  which  is  repre- 
sented in  person  or  by  proxy  at  such  meetings  (provided  that  a  law- 
ful quorum  of  stockholders  be  there  represented  in  person  or  by 
proxy)  shall  be  as  valid  and  as  binding  upon  the  corporation  and 
upon  all  the  stockholders  as  though  it  had  been  approved  or  rati- 
fied by  every  stockholder  of  the  corporation. 

SECTION  10.  Compensation  of  Directors.  For  his  attendance  at 
any  meeting  of  the  board  of  directors,  or  of  any  committee  of  the 
board,  every  director  shall  receive  an  allowance  of  ten  cents  for 
every  mile  traveled  by  him  for  attendance  at  such  meeting,  and  also 
the  sum  of  twenty  dollars  for  attendance  at  each  meeting.  The 
same  mileage  allowance  shall  be  made  to  any  officer  who,  by  direc- 
tion of  the  board,  or  of  the  president,  shall  attend  any  such  meet- 
ing. 

ARTICLE  III. 

EXECUTIVE  COMMITTEE  AND  FINANCE  COMMITTEE. 

SECTION  1.  The  board  of  directors  shall  elect  from  the  directors 
an  executive  committee  and  a  finance  committee,  and  shall  designate 
for  each  of  those  committees  a  chairman,  who  shall  continue  to  be 
chairman  of  the  committee  during  the  pleasure  of  the  board  of 
directors. 

The  board  of  directors  shall  fill  vacancies  in  the  executive  com- 
mittee or  in  the  finance  committee  by  election  from  the  directors, 
and  at  all  times  it  shall  be  the  duty  of  the  board  of  directors  to  keep 


FORMS.  223- 

the  membership  of  each  of  such  committees  full,  with  due  regard 
to  the  qualifications  for  such  membership  indicated  in  this  article 
of  the  by-laws. 

All  action  by  the  executive  committee,  or  by  the  finance  com- 
mittee, shall  be  reported  to  the  board  of  directors  at  its  meeting 
next  succeeding  such  action,  and  shall  be  subject  to  revision  or 
alteration  by  the  board  of  directors;  provided,  that  no  rights  or 
acts  of  third  parties  shall  be  affected  by  any  such  revision  or  alter- 
ation. 

The  executive  committee  and  the  finance  committee  each  shall 
fix  its  own  rules  of  proceeding,  and  shall  meet  where  and  as  pro- 
vided by  such  rules,  or  by  resolution  of  the  board  of  directors,  but 
in  every  case  the  presence  of  a  majority  shall  be  necessary  to  con- 
stitute a  quorum. 

In  every  case  the  affirmative  vote  of  a  majority  of  all  the  mem- 
bers of  the  committee  shall  be  necessary  to  its  adoption  of  any  reso- 
lution. 

The  chairman  and  each  of  the  members  of  the  executive  com- 
mittee shall  receive  such  compensation  for  their  services  as  from 
time  to  time  shall  be  fixed  by  the  finance  committee  and  be  approved 
by  the  board  of  directors. 

SECTION  2.  The  executive  committee  shall  consist  of  six  members, 
besides  the  president,  and  the  chairman  of  the  finance  committee, 
each  of  whom,  by  virtue  of  his  office,  shall  be  a  member  of  the 
executive  committee.  So  far  as  practicable  each  of  the  six  elected 
members  of  the  executive  committee  shall  be  a  person  having,  or 
having  had,  personal  experience  in  the  conduct  of  one  or  the  other 
of  the  branches  of  manufacture  or  mining,  or  of  transportation  in 
which  the  company  is  interested;  and,  so  far  as  practicable,  the  six 
elected  members  shall  be  taken  equally  from  the  three  classes  of 
directors.  Unless  otherwise  ordered  by  the  board  of  directors,  each 
elected  member  of  the  executive  committee  shall  continue  to  be 
a  member  thereof  until  the  expiration  of  his  term  of  office  as  a 
director. 

During  the  intervals  between  the  meetings  of  the  board  of 
directors  the  executive  committee  shall  possess,  and  may  exercise, 
all  the  powers  of  the  board  of  directors  in  the  management  and 
direction  of  the  manufacturing,  mining  and  transportation  opera- 
tions of  the  company,  and  of  all  other  business  and  affairs  (except 
the  matters  hereinafter  assigned  to  the  finance  committee)  in  such 
manner  as  the  executive  committee  shall  deem  best  for  the  inter- 
ests of  the  company,  in  all  cases  in  which  specific  directions  shall 
not  have  been  given  by  the  board  of  directors. 

During  the  intervals  between  the  meetings  of  the  executive  com- 


224:  MODERN"   BUSINESS    CORPORATIONS. 

mittee  the  chairman  thereof  shall  possess  and  may  exercise  such 
of  the  powers  vested  in  the  executive  committee  as  from  time  tc 
time  may  be  conferred  upon  him  by  resolution  of  the  board  ol 
directors,  or  of  the  executive  committee. 

SECTION  3.  The  finance  committee  shall  consist  of  four  members, 
besides  the  president,  and  the  chairman  of  the  executive,  each  of 
whom,  by  virtue  of  his  office,  shall  be  a  member  of  the  finance  com- 
mittee. So  far  as  practicable  each  of  the  four  elected  members  of 
the  finance  committee  shall  be  a  person  of  experience  in  matters 
of  finance,  and  so  far  as  practicable  the  four  elected  members  shall 
be  taken  equally  from  the  three  classes  of  directors.  Unless  other- 
wise ordered  by  the  board  of  directors,  each  elected  member  of  the 
finance  committee  shall  continue  to  be  a  member  thereof  until  the 
expiration  of  his  term  of  office  as  a  director. 

The  finance  committee  shall  have  special  and  general  charge 
and  control  of  all  financial  affairs  of  the  company.  The  general 
counsel,  the  treasurer,  the  auditor  and  the  secretary,  and  their  re- 
spective offices,  shall  be  under  the  direct  control  and  supervision  of 
the  finance  committee. 

During  the  intervals  between  the  meetings  of  the  board  of 
directors,  the  finance  committee  shall  possess,  and  may  exercise,  all 
the  powers  of  the  board  of  directors  in  the  management  of  the 
financial  affairs  of  the  company,  including  its  purchases  of  prop- 
erty and  the  execution  of  legal  instruments  with  or  without  the 
corporate  seal  in  such  manner  as  said  committee  shall  deem  to  be 
best  for  the  interests  of  the  company,  in  all  cases  in  which  specific 
directions  shall  not  have  been  given  by  the  board  of  directors. 

During  the  intervals  between  the  meetings  of  the  finance  com- 
mittee, and  subject  to  its  review,  the  chairman  thereof  shall  pos- 
sess, and  may  exercise  any  of  the  powers  of  the  committee,  except 
as  from  time  to  time  shall  be  otherwise  provided  by  resolution  of 
the  board  of  directors,  or  of  the  finance  committee,  but  not  of  the 
executive  committee. 

Except  as  otherwise  provided  by  the  by-laws,  or  by  resolution  of 
the  board  of  directors,  all  salaries  and  compensations  paid  or  paya- 
ble by  the  company  shall  be  fixed  by  the  finance  committee. 

No  director  shall  become  a  salaried  employe  of  the  company  ex- 
cept by  special  vote  of  the  finance  committee. 

ARTICLE  IV. 

OFFICERS. 

SECTION  1.  Officers.  The  executive  officers  of  the  company  shall 
be  a  president,  a  vice-president,  or  more  than  one  vice-president,  a 


FORMS.  225 

general  counsel,  a  treasurer,  a  secretary  and  an  auditor,  all  of  whom 
shall  be  elected  by  the  board  of  directors. 

The  board  of  directors  may  appoint  such  other  officers  as  they 
shall  deem  necessary,  who  shall  perform  such  duties  as  from  time 
to  time  may  be  prescribed  by  the  board  of  directors.  # 

The  powers  and  duties  of  the  treasurer  and  secretary  may  be  ex-  . 
ercised  and  performed  by  the  same  person. 

In  its  discretion  the  board  of  directors,  by  the  vote  of  a  majority 
thereof,  may  leave  unfilled  for  any  such  period  as  it  may  fix  by 
resolution  any  office  except  those  of  president,  treasurer,  secretary 
and  auditor. 

All  officers  and  agents  shall  be  subject  to  removal  at  any  time 
by  the  affirmative  vote  of  a  majority  of  the  whole  board  of  directors. 
All  officers,  agents  and  employes,  other  than  officers  appointed  by 
the  board  of  directors,  shall  hold  office  at  the  discretion  of  the  com- 
mittee or  of  the  officer  appointing  them. 

The  finance  committee  shall  have  power  to  suspend  the  general 
counsel,  the  treasurer,  the  secretary  and  the  auditor,  and  to  remove 
any  one  in  the  department  of  the  general  counsel,  of  the  treasurer, 
or  of  the  secretary  or  of  the  auditor.  The  executive  committee  shall 
have  power  to  remove  all  officers,  agents  and  employes  of  the  com- 
pany, except  officers  elected  or  appointed  by  the  board  of  directors, 
and  except  officers,  agents  and  employes  in  the  department  of  the 
treasurer,  of  the  secretary,  of  the  general  counsel  or  of  the  auditor. 

SECTION  2.    Powers  and  Duties  of  the  President.    The  president  . 
shall  preside  at  all  meetings  of  the  stockholders,  and  of  the  board  - 
of  directors,  and  by  virtue  of  his  office  he  shall  be  a  member  (but  . 
not  chairman)  of  the  executive  committee  and  of  the  finance  com- 
mittee.   Subject  to  the  executive  committee,  he  shall  have  general 
charge  of  the  business  of  the  company,  including  manufacturing, 
mining  and  transportation,  may  sign   and   execute  all  authorized 
bonds,  contracts  or  other  obligations  in  the  name  of  the  company, 
and  with  the  treasurer  or  an  assistant  treasurer  may  sign  all  cer- 
tificates of  the  shares   in  the  capital   stock  of  the  company.    He 
shall  do  and  perform  such  other  duties  as  from  time  to  time  may 
be  assigned  to  him  by  the  board  of  directors. 

SECTION  3.  Vice-Presidents.  The  board  of  directors  may  appoint 
a  vice-president  or  more  than  one  vice-president.  Each  vice-presi- 
dent shall  have  such  powers  and  shall  perform  such  duties  as  may 
be  assigned  him  by  the  board  of  directors. 

SECTION  4.    The  General  Counsel.    The  general  counsel  shall  be 
the  chief  consulting  officer  of  the  company  in  all  legal   matters, 
and,  subject  to  the  board  of  directors  and  the  finance  committee, 
MOD.  Bus.  CORP. — 15  *• 


226  MODERN   BUSINESS   CORPORATIONS. 

shall  have  general  control  of  all  matters  of  legal  import  concerning 
the  company. 

SECTION  5.  Powers  and  Duties  of  Treasurer.  The  treasurer  shall 
have  custody  of  all  the  funds  and  securities  of  the  company  which 
may  have  come  into  his  hands;  when  necessary  or  proper  he  shall 
indorse,  on  behalf  of  the  company  for  collection,  checks,  notes 
and  other  obligations,  and  shall  deposit  the  same  to  the  credit  of 
the  company  in  such  bank  or  banks  or  depositary  as  the  board  of 
directors  or  the  finance  committee  may  designate;  he  shall  sign 
all  receipts  and  vouchers  for  payments  made  to  the  company; 
jointly  with  such  other  officer  as  may  be  designated  by  the  finance 
committee  he  shall  sign  all  checks  made  by  the  company,  and  shall 
pay  out  and  dispose  of  the  same  under  the  direction  of  the  board 
or  of  the  finance  committee;  he  shall  sign,  with  the  president,  or 
such  other  person  or  persons  as  may  be  designated  for  the  purpose 
by  the  board  of  directors  or  the  finance  committee,  all  bills  of  ex- 
change and  promissory  notes  of  the  company;  he  may  sign,  with 
the  president  or  a  vice-president,  all  certificates  of  shares  in  the 
capital  stock;  whenever  required  by  the  board  of  directors  or  by 
the  finance  committee  he  shall  render  a  statement  of  his  cash 
account;  he  shall  enter  regularly,  in  books  of  the  company  to  be 
kept  by  him  for  the  purpose,  full  and  accurate  accounts  of  all 
moneys  received  and  paid  by  him  on  account  of  the  company;  he 
shall,  at  all  reasonable  times,  exhibit  his  books  and  accounts  to 
any  director  of  the  company  upon  application  at  the  office  of  the 
company  during  business  hours,  and  he  shall  perform  all  acts 
incident  to  the  position  of  treasurer,  subject  to  the  control  of  the 
board  of  directors  or  of  the  finance  committee.  By  virtue  of  his  office 
the  treasurer  shall  be  assistant  secretary. 

He  shall  give  a  bond  for  the  faithful  discharge  of  his  duties  in 
such  sum  as  the  board  of  directors  or  the  finance  committee  may 
require. 

SECTION  6.  Assistant  Treasurers.  The  board  of  directors  or  the 
finance  committee  may  appoint  an  assistant  treasurer  or  more 
than  one  assistant  treasurer.  Each  assistant  treasurer  shall  have 
such  powers  and  shall  perform  such  duties  as  may  be  assigned  to 
him  by  the  board  of  directors,  or  by  the  finance  committee. 

SECTION  7.  Powers  and  Duties  of  Secretary.  The  secretary  shall 
keep  the  minutes  of  all  meetings  of  the  board  of  directors,  and  the 
minutes  of  all  meetings  of  the  stockholders,  and  also  (unless  other- 
wise directed  by  the  finance  committee)  the  minutes  of  all  com- 
mittees in  books  provided  for  that  purpose;  he  shall  attend  to  the 
giving  and  serving  of  all  notices  of  the  company;  he  may  sign 
with  the  president  in  the  name  of  the  company  all  contracts  author- 


FORMS.  227 

ized  by  the  board  of  directors,  or  by  the  finance  committee,  and, 
when  so  ordered  by  the  board  of  directors  or  the  finance  committee, 
he  shall  affix  the  seal  of  the  company  thereto;  he  shall  have  charge 
of  the  certificate  books,  transfer  books  and  stock  ledgers,  and  such 
other  books  and  papers  as  the  board  of  directors  or  the  finance 
committee  may  direct,  all  of  which  shall,  at  all  reasonable  times, 
be  open  to  the  examination  of  any  director,  upon  application  at 
the  office  of  the  company  during  business  hours,  and  he  shall  in 
general  perform  all  the  duties  incident  to  the  office  of  secretary,, 
subject  to  the  control  of  the  board  of  directors  and  of  the  finance 
committee.  By  virtue  of  his  office  the  secretary  shall  be  assistant 
treasurer. 

SECTION  8.  Assistant  Secretaries.  The  board  of  directors  or  the 
finance  committee  may  appoint  one  assistant  secretary  or  more  than 
one  assistant  secretary.  Each  assistant  secretary  shall  have  such 
powers  and  shall  perform  such  duties  as  may  be  assigned  to  him 
by  the  board  of  directors,  or  by  the  finance  committee. 

SECTION  9.  Auditor.  The  auditor  shall  be  the  principal  officer  in 
charge  of  the  accounts  of  the  company,  and  shall  perform  such 
duties  as  from  time  to  time  may  be  assigned  to  him  by  the  board  ot 
directors  or  the  finance  committee. 

SECTION  10.  Voting  upon  Stocks.  Unless  otherwise  ordered  by  the 
board  of  directors,  or  by  the  finance  committee,  the  chairman  of 
the  finance  committee  or  the  chairman  of  the  executive  committee 
shall  have  full  power  and  authority  in  behalf  of  the  company  to 
attend  and  to  act  and  to  vote  at  any  meetings  of  the  stockholders  of 
any  corporation  in  which  the  company  may  hold  stock,  and  at  any 
such  meeting  shall  possess  and  may  exercise  any  and  all  the  rights, 
and  powers  incident  to  the  ownership  of  such  stock  and  which,  as 
the  owner  thereof,  the  company  might  have  possessed  and  exer- 
cised if  present.  The  board  of  directors  of  the  finance  committee,  by 
resolution,  from  time  to  time,  may  confer  like  powers  upon  any 
other  person  or  persons. 

< 

ARTICLE  V. 

CAPITAL    STOCK — SEAL. 

SECTION  1.  Certificates  of  Shares.  The  certificates  for  shares  of 
the  capital  stock  of  the  company  shall  be  in  such  form,  not  incon- 
sistent with  the  certificate  of  incorporation,  as  shall  be  prepared 
or  be  approved  by  the  board  of  directors.  The  certificates  shall  be 
signed  by  the  president  or  a  vice-president,  and  also  by  the  treas- 
urer or  an  assistant  treasurer. 

All  certificates  shall  be  consecutively  numbered.    The  name  of. 


228  MODERN   BUSINESS    CORPORATIONS. 

the  person  owning  the  shares  represented  thereby,  with  the  number 
of  such  shares  and  the  date  of  issue,  shall  be  entered  on  the  com- 
pany's books. 

No  certificate  shall  be  valid  unless  it  be  signed  by  the  president 
or  a  vice-president,  and  by  the  treasurer  or  an  assistant  treasurer. 
All  certificates  surrendered  to  the  company  shall  be  cancelled,  and 
no  new  certificate  shall  be  issued  until  the  former  certificate  for  the 
same  number  of  shares  of  the  same  class  shall  have  been  surren- 
dered and  canceled. 

SECTION  2.  Transfer  of  Shares.  Shares  in  the  capital  stock  of 
the  company  shall  be  transferred  only  on  the  books  of  the  company 
by  the  holder  thereof  in  person,  or  by  his  attorney,  upon  surrender 
and  cancellation  of  certificates  for  a  like  number  of  shares. 

SECTION  3.  Regulations.  The  board  of  directors,  and  the  finance 
committee  also,  shall  have  power  and  authority  to  make  all  such 
rules  and  regulations  as  respectively  they  may  deem  expedient  con- 
cerning the  issue,  transfer  and  registration  of  certificates  for  shares 
of  the  capital  stock  of  the  company. 

The  board  of  directors  or  the  finance  committee  may  appoint  a 
transfer  agent  and  a  registrar  of  transfers,  and  may  require  all 
stock  certificates  to  bear  the  signature  of  such  transfer  agent  and 
of  such  registrar  of  transfers. 

SECTION  4.  Closing  of  Transfer  Books.  The  stock  transfer  books 
shall  be  closed  for  the  meetings  of  the  stockholders,  and  for  the 
payment  of  dividends,  during  such  periods  as  from  time  to  time 
may  be  fixed  by  the  board  of  directors  or  by  the  finance  committee, 
and  during  such  periods  no  stock  shall  be  transferable. 

SECTION  5.  Dividends.  The  board  of  directors  may  declare  divi- 
dends from,  the  surplus  or  net  profits  of  the  company  over  and 
above  the  amount  which  from  time  to  time  may  be  fixed  by  the 
board  as  the  amount  to  be  reserved  as  working  capital. 

The  dates  for  the  declaration  of  dividends  upon  the  preferred 
stock  and  upon  the  common  stock  of  the  company  shall  be  the  days 
by  these  by-laws  fixed  for  the  regular  monthly  meetings  of  the 
board  of  directors  in  the  months  of  April,  July,  October  and  Janu- 
ary in  each  year,  on  which  days  the  board  of  directors,  in  its  dis- 
cretion, shall  declare  what,  if  any,  dividends  shall  be  declared  upon 
the  preferred  stock,  and  the  common  stock,  or  either  of  such  stocks. 
The  dividends  on  the  preferred  stock  shall  be  payable  quarterly 
on  the  fourth  Wednesday  next  after  the  several  dates  of  the  declar- 
ation thereof. 

SECTTON  6.  Working  Capital.  The  directors  shall  not  be  required 
in  January  in  each  year,  after  reserving,  over  and  above  its  capital 
stock  paid  in  as  a  working  capital  for  said  corporation,  such  sum, 


FORMS.  229 

if  any,  as  shall  have  been  fixed  by  the  stockholders,  to  declare  a  divi- 
dend among  its  stockholders  of  the  whole  of  its  accumulated  profits 
exceeding  the  amount  so  reserved,  and  pay  the  same  to  such  stock- 
holders on  demand;  but  the  board  of  directors  may  fix  a  sum  which 
may  be  set  aside  or  reserved,  over  and  above  the  company's  capital 
paid  in,  as  a  working  capital  for  the  company,  and  from  time  to 
time  they  may  increase,  diminish  and  vary  the  same  in  their  abso- 
lute judgment  and  discretion.* 

SECTION  7.  Corporate  Seal.  The  board  of  directors  shall  provide 
a  suitable  seal,  containing  the  name  of  the  company,  which  seal 
shall  be  in  charge  of  the  secretary,  if  and  when  so  directed  by  the 
board  of  directors  or  by  the  finance  committee.  A  duplicate  of  the 
seal  may  be  kept  and  used  by  the  treasurer  or  by  any  assistant  secre- 
tary or  assistant  treasurer. 

ARTICLE  VI. 

AMENDMENTS. 

SECTION  1.  The  board  of  directors  shall  have  power  to  make, 
amend  and  repeal  the  by-laws  of  the  company,  by  a  vote  of  a  ma- 
jority of  all  of  the  directors,  at  any  regular  or  special  meeting  of 
the  board,  provided,  that  notice  of  intention  to  make,  amend  or  re- 
peal the  by-laws  in  whole  or  in  part  shall  have  been  given  at  the 
next  preceding  meeting;  or  without  any  such  notice,  by  a  vote  of 
two-thirds  of  all  of  the  directors. 

Form  13.    Common  Form  of  Common  Stock  Certificate  and 

Stub. 

United  States  of  America — Incorporated  under  the  laws  of  In- 
diana. 

NUMBER.  SHARES. 

17  50 

THE  KING-RICHARDSON  MANUFACTURING  COMPANY,  Indianapolis,  Ind. 
This  Certifies  that  Charles  Bishop  is  the  owner  of  fifty  shares  of 
the  capital  stock  of  The  King-Richardson  Manufacturing  Company, 
of  Indianapolis,  transferable  only  on  the  books  of  the  Corporation 
by  the  holder  hereof  in  person  or  by  attorney  upon  surrender  of 
this  certificate  properly  indorsed. 

IN  WITNESS  WHEREOF,  the  said  corporation  has  caused  this  certifi- 
cate to  be  signed  by  its  duly  authorized  officers  and  to  be 
[SEAL]    sealed  with  the  seal  of  the  corporation  this  ninth  day  of 

May,  A.  D.,  1901. 
FBANK  RICHARDSON,  JOHN  M.  KING, 

Treasurer.  President. 

*  This  is  a  very  poorly  worded  section. 


230  MODERN   BUSINESS   CORPORATIONS. 

(Stub,) 

CERTIFICATE* 

No.  17. 
For  fifty  (50)   Shares. 

Issued  to 
CHARLES  BISHOP,  Indianapolis. 

Dated  May  9,  1901. 
From  Whom  Transferred 


Dated  ,  190.. 

NO.    ORIGINAL  NO.    ORIGINAL  NO.    OF   SHARES 

CERTIFICATE.  SHARES.  TRANSFERRED. 


Received  Certificate  No.  17.    For  fifty  (50)   Shares  this  10th  day 
of  May,  1901.  CHARLES  BISHOP. 


Ponn  14.     Common  Stock  Certificate  Containing  Notice  and 
Terms  of  Preferred  Stock  Issue. 

United  States  of  America — Incorporated  under  the  laws  of  In- 
diana. 

NUMBER.  SHARES. 

54 

CLARK  &  ROBERTS  COMPANY,  Indianapolis,  Ind. 
Main  office,  Indianapolis,  Ind. 

CAPITAL    STOCK,  COMMON    STOCK,    $150,000 

$200,000  PREFERRED    STOCK,          50,000 

This  Certifies  that  is  the  owner  of shares  of 

one  hundred  $100)  dollars  each  of  the  comment  Capital  stock  of 
the  Clark  &  Roberts  Company.  This  certificate  is  transferable  only 
on  the  books  of  the  company  at  Indianapolis,  Ind.,  by  the  owner 
thereof,  in  person  or  by  duly  authorized  attorney,  upon  its  surren- 
der property  indorsed. 

It  is  mutually  agreed  between  the  holder  hereof  and  the  Clark  & 
Roberts  Company  and  its  stockholders  as  follows:  The  preferred 

*  This  form  will  also  answer  for  the  stub  of  a  preferred  stock 
certificate,  but  if  both  common  and  preferred  stock  have  been  issued 
the  heading  may  specify  the  kind  of  certificate  issued. 

t  The  word  "Preferred"  appears  here  on  the  preferred  certificate 
of  this  company,  which  is  the  only  difference  in  wording. 


FORMS.  231 

capital  stock  is  entitled  to  receive  preferential  dividends  from  the 
net  earnings  of  the  company  at  the  rate  of  seven  (7)  per  centum 
per  annum,  payable  semi-annually,  before  any  dividend  shall  be  set 
apart  or  paid  from  the  earnings  of  any  period  upon  the  common 
capital  stock. 

Dividends  upon  the  preferred  stock  shall  be  cumulative,  and  if 
the  proportion  of  the  net  earnings  set  apart  in  any  year  for  divi- 
dends shall  not  be  sufficient  to  pay  the  dividend  for  such  year  at  the 
rate  of  seven  (7)  per  centum  per  annum  upon  said  preferred  capi- 
tal stock,  then  the  same  shall  be  made  up  from  any  profits  of  any 
later  period.  After  declaring  and  providing  for  the  payment  of  a 
semi-annual  dividend  of  three  and  one-half  (3 Ms)  per  centum  upon 
the  preferred  capital  stock,  together  with  arrearages  of  dividends 
due  thereon,  such  portion  of  the  remaining  net  earnings  set  apart 
for  dividends  may  be  used  for  paying  dividends  on  the  common 
capital  stock  as  the  board  of  directors  may  decide. 

The  power  to  fix  the  amount  to  be  reserved  as  working  capital 
for  the  organization,  and  the  power  to  declare  dividends  from  the 
net  earnings  of  the  company  are  vested  in  the  board  of  directors. 
The  dividends  upon  the  common  capital  stock  of  the  company  may 
be  declared  and  made  payable  semi-annually  or  annually,  as  the 
board  of  directors  may  from  time  to  time  determine.  The  par  value 
of  the  preferred  capital  stock;  in  the  event  of  insolvency  or  dis- 
solution of  the  company,  making  necessary  a  distribution  of  the 
assets,  shall  be  repaid  in  full  after  the  payment  of  its  obligations, 
before  any  sum  whatever  shall  be  distributed  upon  the  common 
capital  stock;  but  after  a  complete  repayment  of  the  par  value  of  the 
preferred  capital  stock,  together  with  arrearages  of  dividends  due 
thereon,  the  common  capital  stock  shall  be  entitled  to  receive  the 
entire  assets  remaining.  Preferred  capital  stock,  in  whole  or  in 
part,  may,  after  twenty  years  from  date  of  issue,  at  the  time  of 
paying  any  semi-annual  dividend,  be  retired  by  the  corporation  at 
par,  upon  six  months'  notice  in  writing,  by  paying  the  owner  or 
owners  thereof  the  par  value,  together  with  any  dividends  due 
thereon.  Preferred  stock  may  be  purchased  and  cancelled  by  the 
board  of  directors  by  agreement  with  the  holder  thereof,  at  any 
time  after  one  year  from  the  date  of  its  issue. 

Witness  the  corporate  seal  of  The  Clark  &  Roberts  Company  and 
the  signature  of  its  president  and  treasurer. 

Dated :    Indianapolis,  Indiana,  this  day  of ,  190 .. 


Treasurer.  President. 

Shares  $100  each. 


232  MODERN   BUSINESS    CORPORATIONS. 


Form  15.    Sentence  Granting  Additional  Pro  Hat  a  Dividend  to 
Preferred  Stock. 

"This  preferred  stock  is  entitled  to  share  pro  rata  with  the  com- 
mon stock  in  any  dividend  exceeding  six  per  cent,  on  the  whole 
stock  of  said  corporation,  both  preferred  and  common." 


Form  16.     Founders'  Shares — Stock  Certificate. 
Incorporated  under  the  laws  of  New  Jersey. 

NUMBER.  SHAKES. 

MORGAN  MILLING  COMPANY,  Trenton,  New  Jersey. 
Capital  Stock,  $100,000. 

This  certifies  that is  the  owner  of founders' 

shares,  numbered  (giving  them),  of  one  hundred  dollars  each,  of  the 
capital  stock  of  the  Morgan  Milling  Company.  This  certificate  is 
transferable  only  on  the  books  of  the  company  by  the  owner  thereof 
in  person,  or  by  duly  authorized  attorney,  upon  its  surrender  prop- 
erly indorsed. 

It  is  mutually  agreed  between  the  said  company  and  the  holder 
hereof  that  said  founders'  shares  are  subject  to  the  provisions  of  a 
certain  resolution  adopted  by  the  stockholders  of  said  company  on 

the day  of ,  1905,  which  provided  for  the  creation  and 

issue  of  not  more  than  two  hundred  founders'  shares  of  the  par 
value  of  one  hundred  dollars  each  of  the  capital  stock  of  said  com- 
pany, subject  to  redemption  as  specified  in  said  resolution.  And  the 
holder  of  this  certificate  acknowledges  notice  of  all  the  provisions 
of  said  resolution,  and  hereby  assents  to  the  same  and  agrees  to 
hold  his  said  founders'  shares  evidenced  by  this  certificate  subject 
thereto. 

IN  WITNESS  WHEREOF  the  said  Morgan  Milling  Company  has  caused 
the  names  of  its  president  and  treasurer  to  be  signed  to  this  certifi- 
cate and  its  corporate  seal  to  be  affixed  hereto. 
[SEAL.] 


Treasurer.  President. 

Attest Secretary. 

Form  17.     Certificate  Form  Used  by  Standard  Oil  Company. 

This  is  to  certify  that is  entitled  to shares  of 

one  hundred  dollars  each  in  the  capital  stock  of  the  Standard  Oii 


FORMS.  233 

Company,  transferable  on  the  books  of  the  company  in  person  or 
by  attorney  only  on  the  surrender  of  this  certificate  and  the  pay- 
ment of  all  liabilities  on  the  part  of  the  holder  to  the  company  sub- 
ject to  the  provisions  of  law  and  the  by-laws  of  the  company.  (Wit- 
nessed by  signatures  of  president  and  secretary.) 


Form  18.    Form  of  Assignment  and  Transfer  on  Back  of  Stock 

Certificate. 

For  value  received,  I  hereby  sell,  assign,  and  transfer  unto  Charles 
Holliday,  of  Indianapolis,  twenty  (20)  shares  of  the  capital  stock 
represented  by  the  within  certificate,  and  do  hereby  irrevocably  con- 
stitute and  appoint  Harry  Alter  my  attorney  to  transfer  the  said 
stock  on  the  book  of  the  within  named  corporation  with  full  power 
of  substitution  in  the  premises. 
Dated  June  12,  1904. 

In  presence  of  RICHARD  MAETINDALE. 

LEBOY  SCOTT, 
Witness. 


Form  19.    First  Mortgage  Gold  Bond  of  the  Indianapolis  and 
Cincinnati  Traction  Company. 

(Convertible  from  Coupon  to  Registered  Bond.) 
The  Indianapolis  and  Cincinnati  Traction  Company.  First  Mort- 
gage Five  Per  Cent.  Gold  Bond.  No.  1263. 
Be  it  knoum  that  The  Indianapolis  and  Cincinnati  Traction  Com- 
pany, incorporated  under  the  laws  of  Indiana,  for  value  received, 
promises  to  pay  to  the  bearer  hereof,  or  if  this  bond  shall  be  regis- 
tered, then  to  the  holder  hereof  registered  according  to  the  provi- 
sions hereinafter  contained,  without  relief  from  valuation  or  ap- 
praisement laws,  the  sum  of  ONE  THOUSAND  DOLLARS  in  gold  coin  of 
the  United  States  of  the  present  standard  of  weight  and  fineness, 
at  the  office  of  the  Farmers'  Loan  and  Trust  Company  in  the  city 
of  New  York,  on  the  first  day  of  July,  1933,  and  also  to  pay  interest 
thereon  in  like  coin  at  the  rate  of  five  per  cent,  per  annum  on  the 
first  days  of  January  and  July  in  each  year  to  the  bearer  of  the 
respective  coupons  for  such  interest  hereto  annexed  upon  presenta- 
tion thereof,  at  the  time  and  place  therein  mentioned;  but  if  the 
promisor  shall  make  any  default  for  six  months  in  the  payment  of 
any  interest  hereon,  or  on  any  bond  of  this  issue,  the  principal  sum 
hereby  secured  shall  become  due  and  payable  at  any  time  thereafter 
while  the  interest  remains  in  default,  at  the  election  of  a  majority 


234  MODERN   BUSINESS   CORPORATIONS. 

in  interest  of  the  holders  of  the  bonds  secured  by  the  indenture 
hereinafter  mentioned  at  the  time  outstanding.  Both  the  principal 
and  interest  of  this  bond  are  payable  without  deduction  for  any  tax 
or  taxes  which  the  promisor  may  be  required  to  pay  or  retain  there- 
from under  any  present  or  future  law  of  the  United  States,  or  of 
the  state  of  Indiana,  or  any  county  or  municipality  therein.  This 
bond  is  one  of  a  series  of  four  thousand  similar  bonds,  amounting 
in  the  aggregate  to  four  million  dollars,  all  of  which  are  equally 
secured  by  an  indenture  of  first  mortgage,  dated  the  first  day  of 
July,  1903,  whereby  all  the  property,  real  and  personal,  easements, 
rights,  franchises,  and  privileges,  present  and  future,  of  the  Indian- 
apolis and  Cincinnati  Traction  Company  are  mortgaged  to  the 
Farmers'  Loan  and  Trust  Company  as  trustee  for  the  bondholders. 
No  recourse  shall  be  had  for  the  payment  of  the  principal  or  inter- 
est of  this  bond  against  any  stockholder,  officer  or  director  of  the 
promisor,  either  directly  or  through  the  promisor,  by  virtue  of  any 
statute,  or  by  enforcement  of  any  assessment  or  otherwise,  and  any 
and  all  personal  liability  of  the  officers,  directors  and  stockholders 
of  the  promisor  in  respect  of  said  bonds  is  hereby  expressly  waived 
and  released  by  every  holder  hereof.  This  bond  until  registered 
shall  pass  by  delivery.  This  bond  may  be  registered  in  books  to  be 
kept  for  that  purpose  at  the  office  of  the  trustee,  in  the  city  of 
New  York,  and  if  so  registered  will  thereafter  be  transferable  only 
upon  the  said  books  at  the  office  of  the  trustee  by  the  owner  in  per- 
son or  by  attorney,  unless  the  last  preceding  registration  shall  have 
been  to  bearer  and  the  transfer  by  delivery  thereby  restored,  and  it 
shall  continue  to  be  susceptible  of  successive  registrations  and  trans- 
fers at  the  option  of  the  holder,  but  such  registration  shall  not  af- 
fect the  negotiability  of  the  annexed  coupons.  This  bond  is  valid 
only  when  the  Farmers'  Loan  and  Trust  Company  has  indorsed 
hereon  a  certificate  that  it  is  one  of  the  bonds  in  the  said  indenture 
specified. 

Witness  the  corporate  seal  of  the  Indianapolis  and  Cincinnati 
Traction  Company  and  the  signatures  of  its  president  and  secretary 
on  its  behalf,  the  first  day  of  July,  in  the  year  1903. 

THE  INDIANAPOLIS  AND  CINCINNATI  TRACTION  COMPANY, 
by 


Secretary.  President. 

TBUSTEE'S  CERTIFICATE. 
(On  back  of  bond.) 

The  Farmers'  Loan  and  Trust  Company  hereby  certifies  that  this 


FORMS.  235 

bond  is  one  of  the  series  described  in  the  within  mentioned  mortgage 
amounting  in  the  aggregate  to  four  million  dollars. 

THE  FABMEBS'  LOAN  AND  TBUST  COMPANY,  Trustee. 
By ,  President. 

Form  20.     Sinking  Fund  Bond. 

[On  the  back  the  title  as  follows.] 

No The  Keithsburg  Bridge  Company  First  Mortgage 

Six  Per  Cent.  Sinking  Fund  Bond,  $1,000.  Guaranteed  by  the  Central 
Iowa  Railway  Company.  Interest  payable  June  1st  and  December 
1st.  Principal  due  Just  1st,  1925. 

TBUSTEE'S  CERTIFICATE. — The  Central  Trust  Company  of  New  York 
hereby  certifies  that  this  bond  is  one  of  a  series  of  bonds  described 
in  the  mortgage  or  trust  deed,  within  mentioned,  and  has  been  certi- 
fied by  this  company  in  accordance  with  the  terms  of  said  trust  deed. 
CENTBAL  TBUST  Co.  OF  NEW  YORK,  Trustee,  by President. 

[On  the  face.] 

No $1,000. 

STATES  OF  ILLINOIS  AND  IOWA. 
THE  KEITHSBURG  BRIDGE  COMPANY. 

FIRST  MORTGAGE  SIX  PER  CENT.  SINKING  FUND  BOND. 
GUARANTEED  BY  THE  CENTRAL  IOWA  RAILWAY  COMPANY. 

Know  all  men  by  these  presents,  That  the  Keithsburg  Bridge 
Company,  a  corporation  organized  and  existing  under  the  laws  of 
the  state  of  Illinois  and  vested  also  with  certain  franchises  conferred 
by  an  act  of  congress,  approved  April  26,  1882,  entitled  "An  Act  to 
authorize  the  construction  of  a  bridge  across  the  Mississippi  river 
at  or  near  Keithsburg,  in  the  state  of  Illinois,  and  to  establish  it  as 
a  Post  Road,"  is  indebted  to  the  Central  Trust  Company  of  New 
York,  or  bearer,  in  the  sum  of  one  thousand  dollars,  lawful  money 
of  the  United  States  of  America,  which  the  said  Bridge  Company 
promises  to  pay  to  the  bearer  hereof  in  the  city  of  New  York,  on  the 
first  day  of  June,  in  the  year  one  thousand  nine  hundred  and 
twenty-five,  with  interest  thereon  at  the  rate  of  six  per  cent,  per 
annum,  payable  in  the  like  lawful  money,  at  its  office  or  agency  in 
the  city  of  New  York,  on  the  first  days  of  June  and  December  in 
each  year,  upon  the  presentation  and  surrender  of  the  coupons  here- 
to attached  as  they  severally  become  due,  as  provided  herein.  And 
in  case  of  default  in  the  payment  of  any  half-yearly  instalment  of 
interest  which  shall  have  become  due  and  been  demanded,  and  such 
default  shall  have  continued  six  months  after  demand,  or  in  case 
of  default  in  the  payment  of  any  sum  into  the  sinking  fund,  as  here- 


236  MODERN   BUSINESS    CORPORATIONS. 

inafter  provided,  the  principal  of  this  bond  shall  become  due  in  the 
manner  and  with  the  effect  provided  for  in  the  trust  deed  or  mort- 
gage hereinafter  mentioned.  This  bond  is  one  of  a  series  of  six 
hundred  bonds,  numbered  consecutively  from  1  to  600,  both  inclu- 
sive, each  for  the  sum  of  one  thousand  dollars,  amounting  in  the 
aggregate  to  six  hundred  thousand  dollars,  all  of  like  tenor,  date 
and  effect,  and  all  equally  secured  by  a  trust  deed  or  mortgage  bear- 
ing even  date  herewith,  duly  executed  and  delivered  by  the  said 
Bridge  Company,  and  duly  recorded  in  the  proper  offices  in  the 
states  of  Illinois  and  Iowa,  and  conveying  to  said  Central  Trust 
Company  of  New  York,  in  trust,  the  bridge  of  the  said  Keithsburg 
Bridge  Company,  as  the  same  is  now,  or  may  hereafter  be,  con- 
structed across  the  Mississippi  river,  from  a  point  in  or  near 
Keithsburg,  in  the  state  of  Illinois,  to  a  point  in  or  near  the  town- 
ship of  Elliot,  in  the  county  of  Louisa,  in  the  state  of  Iowa,  together 
with  the  approaches  thereto  on  either  side  of  said  river,  and  all 
lands  and  real  estate  which  said  Bridge  Company  is  or  may  be- 
come entitled  to  by  reason  of  the  construction  of  the  said  bridge, 
with  the  appurtenances  thereto  belonging;  also,  the  rents,  issues 
and  profits  of  said  bridge,  so  far  as  the  same  are  not  required  to 
pay  the  necessary  current  expenses  of  maintaining,  keeping  in  re- 
pair, and  operating  the  said  bridge.  And  also,  all  and  singular  the 
rights,  privileges,  corporate  property  and  franchises  of  said  Bridge 
Company,  set  forth  in  said  trust  deed  or  mortgage.  This  bond  is 
entitled  to  the  benefit  of  a  sinking  fund  as  provided  by  said  trust 
deed  or  mortgage,  whereby  the  principal  of  said  bond  will  be  re- 
deemed in  forty  years  from  the  date  thereof.  Bonds  equal  in 
amount  to  the  accumulation  of  said  sinking  fund  will  be  redeemed 
at  their  par  value,  annually,  commencing  after  three  years  from  the 
date  hereof.  This  bond  is  also  subject  to  allotment  for  payment 
and  redemption,  as  provided  in  said  trust  deed  or  mortgage,  on  any 
day  on  which  interest  is  payable  thereon.  Notice  of  the  numbers 
of  the  bonds  allotted  for  redemption  will  be  published  in  two  or 
more  daily  newspapers  printed  in  the  city  of  New  York,  for  sixty 
days,  at  the  expiration  of  which  time  the  interest  thereon  shall 
cease.  This  bond  is  further  secured  by  the  guaranty  of  the  Central 
Iowa  Railway  Company  indorsed  hereon,  of  the  payment  of  the 
principal  and  interest  thereof  and  of  the  sums  payable  into  the 
sinking  fund.  This  bond  shall  pass  by  delivery  or  by  transfer  on 
the  books  of  the  company  in  the  city  of  New  York,  and  such  other 
places  as  said  company  may  designate.  After  a  registration  of 
ownership  certified  hereon  by  the  secretary  of  the  company  or  its 
transfer  agent,  no  transfer,  except  on  the  books  of  the  company, 
shall  be  valid  unless  the  last  transfer  shall  have  been  to  bearer,  the 


FORMS.  237 

bond  to  be  entitled  to  successive  registrations  and  transfers  to 
bearer  at  the  option  of  each  holder.  This  bond  is  to  be  valid  only 
when  authenticated  by  the  certificate  of  the  trustee  indorsed  hereon. 
IN  WITNESS  WHEREOF,  the  said  Keithsburg  Bridge  Company  has 
caused  its  corporate  seal  to  be  hereto  affixed,  and  these  presents  to 
be  attested  by  its  president  and  secretary,  this  first  day  of  June, 
1885. 


Secretary.  President. 

[Also  on  the  back.] 

Guarantee  of  the  Central  Iowa  Railway  Company. — The  Central 
Iowa  Railway  Company,  for  value  received,  hereby  guarantees  the 
prompt  payment  of,  and  agrees  to  pay  in  the  city  of  New  York,  all 
the  coupons  attached  to  the  within  bond  as  they  severally  become 
due;  and  also  the  sums  payable  into  the  sinking  fund  therein  men- 
tioned; and  also  the  principal  of  this  bond  at  maturity,  subject  to 
the  right  to  redeem  the  same  before  maturity. 

IN  WITNESS  WHEREOF,  the  said  Railway  Company  has  caused  its 
corporate  seal  to  be  hereto  affixed,  and  the  same  to  be  attested  by 

the  signatures  of  its  president  and  secretary,  this   day  of 

A.  D.  19.. 


Secretary.  President. 

Notice! — No  writing  on  this  bond  except  by  an  officer  of  the  com- 
pany. 

DATE  OF  REGISTRY.  IN  WHOSE  NAME  REGISTERED.  TRANSFER  AGENT. 


[On  the  end,  eighty  coupons,  numbered  on  the  back,  and  dated 
each  first  day  of  June  and  December,  from  1885  to  1925,  the  face  of 
the  first  one  reading:] 

Coupon  No.  1. — The  Keithsburg  Bridge  Company  will  pay  the 
bearer  Thirty  Dollars,  at  its  office  or  agency  in  the  city  of  New  York, 
on  the  first  day  of  December,  A.  D.  1885,  being  six  months'  interest 
on  its  First  Mortgage  Bond  No C.  W.  OSBORNE,  Treasurer. 

Form  21.    Income  Gold  Bond. 

$500  UNITED  STATES  OF  AMERICA.  $500 

ATCHISON,   TOPEKA   AND   SANTA   FE   RAILROAD   COMPANY. 

FIVE  PER  CENT.  INCOME  GOLD  BOND. 

No 

For  value  received,  The  Atchison,  Topeka  and  Santa  Fe  Railroad 


238  MODERN   BUSINESS   CORPORATIONS. 

Company  promises  to  pay  to  bearer,  or  in  case  of  registration  to 
the  registered  holder  hereof,  the  sum  of  Five  Hundred  Dollars,  on 
the  first  day  of  July,  one  thousand  nine  hundred  and  eighty-nine, 
together  with  interest  thereon  when  earned  at  the  rate  of  not  ex- 
ceeding five  per  centum  per  annum,  payable  only  out  of  surplus  net 
earnings,  if  any,  on  the  first  day  of  September,  in  the  year  1890, 
and  upon  the  same  day  in  each  year  hereafter,  on  the  presentation 
and  surrender  of  the  coupons  annexed  and  to  be  annexed  hereto, 
as  they  severally  mature,  both  principal  and  interest  being  payable 
in  gold  coin  of  the  United  States  of  America,  of  the  present  stand- 
ard of  weight  and  fineness,  or  its  equivalent,  at  the  agencies  of  the 
said  Atchison  Company  in  the  cities  of  Boston  or  New  York,  or  at 
the  office  of  Baring  Brothers  &  Company,  London,  England.  The 
principal  of  this  bond  is  payable  only  after  the  principal  and  inter- 
est of  all  the  general  mortgage  four  per  cent,  bonds  of  the  Atchison, 
Topeka  and  Santa  Fe  Railroad  Company,  dated  July  first,  1889, 
shall  have  been  previously  paid  in  full.  Interest  upon  the  principal 
sum  of  this  income  bond,  if  any  is  earned  in  any  year  ending  June 
thirtieth,  shall  be  paid  upon  the  first  day  of  September  following,  at 
a  rate  not  to  exceed  five  per  centum  per  annum,  from  and  out  of  the 
surplus  net  earnings  only  of  the  mortgaged  property,  provided  that 
in  the  judgment  of  the  board  of  directors  of  the  Atchison  Company 
such  surplus  net  earnings  shall  be  sufficient  in  amount  to  justify 
payment  of  interest  on  this  income  bond,  and  such  payment  shall 
be  by  said  board  of  directors  authorized  to  be  so  made.  Such  in- 
terest shall  not  be  cumulative,  and  each  successive  holder  of  this 
income  bond  accepts  the  same  subject  to  the  agreement  that  the 
board  of  directors  of  the  Atchison  Company  shall  in  their  absolute 
discretion  determine  what  are  the  surplus  net  earnings,  if  any,  in 
any  year  ending  June  thirtieth,  and  applicable  to  such  payment  of 
interest,  by  deducting  from  the  amount  of  the  gross  earnings  during 
said  year  all  operating  expenses  of  every  kind,  and  all  fixed  charges, 
including  rentals  of  leased  lines  and  other  property,  interest  of  all 
kinds,  and  taxes  of  all  companies  whose  stocks  are  directly  or  in- 
directly pledged  or  mortgaged  hereunder,  and  after  providing  for 
and  deducting  the  amount  of  the  interest  upon  and  the  sinking  fund 
requirements  of  all  bonds  or  obligations  of  the  Atchison  Company, 
including  the  above  described  general  mortgage  bonds,  and  of  all 
bonds  or  obligations  of  other  companies,  the  payment  of  the  prin- 
cipal or  interest  of  which  has  been  guaranteed  or  assumed  in  whole 
or  in  part  by  the  said  Atchison  Company,  and  after  providing  for 
and  deducting  the  cost  of  the  maintenance,  renewals,  repairs  and 
improvements  of  the  railroad,  telegraph  equipment,  and  appurte- 
nances of  the  Atchison  Company,  and  of  the  railroads  which  at  the 


FORMS.  239' 

date  hereof  or  during  the  life  of  said  income  bonds  may  form  a  part 
of  the  railroad  system  of  the  Atchison  Company.  The  Atchison 
Company  may  at  any  time  at  its  pleasure  redeem  this  bond  at  its 
face  or  par  value  by  giving  notice  of  said  proposed  redemption  six 
months  prior  to  the  first  day  of  September  in  any  year  by  publica- 
tion once  a  week  for  three  successive  weeks  in  any  newspaper  of 
general  circulation  published  in  each  of  the  cities  of  Boston,  New 
York  and  London;  and  interest  upon  this  bond,  when  so  called  for 
redemption,  shall  cease  on  and  after  the  first  day  of  September  fol- 
lowing such  publication.  All  the  provisions  of  the  said  general 
mortgage  are  hereby  expressly  declared  to  be  part  of  this  bond  and 
of  every  coupon  hereto  attached.  No  recourse  shall  be  had  for  the 
payment  of  the  principal  or  interest  of  this  bond  to  any  stockholder, 
officer  or  director  of  said  Atchison  Company,  either  directly  or 
through  the  said  Atchison  Company,  by  virtue  of  any  statute  or  by 
the  enforcement  of  any  assessment  or  otherwise.  All  payments  upon 
this  bond  of  both  principal  and  interest  are  to  be  made  without  de- 
duction for  any  tax  or  taxes  which  said  railroad  company  may  be 
required  to  pay  or  to  retain  therefrom  by  any  present  or  future  laws 
of  the  United  States  of  America,  or  any  of  the  states  and  territories 
thereof,  said  railroad  company  hereby  covenanting  and  agreeing  to 
pay  any  and  all  such  tax  or  taxes.  This  bond  is  one  of  a  series  of 
income  bonds,  coupon  and  registered,  of  like  tenor  and  date,  the 
payment  of  which  is  secured  by  a  general  mortgage  or  deed  of  trust, 
duly  executed  and  delivered  by  the  Atchison,  Topeka  and  Santa  Fe 
Railroad  Company,  the  obligor,  to  the  Union  Trust  Company  of 
New  York,  Trustee,  bearing  date  October  fifteenth,  1889.  This  bond 
shall  pass  by  delivery,  or  if  registered,  by  transfer  upon  the  trans- 
fer books  of  the  company.  After  registration  of  ownership,  certified 
hereon  by  the  transfer  agent  of  the  company,  the  coupons  shall  re- 
main negotiable;  but  no  transfer  of  this  bond,  except  on  the  books 
of  the  company,  shall  be  valid  unless  the  last  transfer  is  to  bearer, 
which  shall  restore  transferability  by  delivery,  and  it  shall  continue 
subject  to  successive  registrations  and  transfers  to  bearer  as  afore- 
said at  the  option  of  each  holder;  or  the  holder  may,  at  any  time,  at 
his  option,  surrender  this  bond  and  the  annexed  coupons  to  the 
company  to  be  cancelled,  and  receive  in  exchange  therefor  a  regis- 
tered bond  of  the  same  issue,  and  thereafter  it  shall  not  be  trans- 
ferable to  bearer,  but  the  interest  shall  be  paid  to  the  registered 
holder.  This  bond  shall  be  valid  only  when  authenticated  by  the 
certificate  hereon  of  the  said  trustee,  or  its  successors  in  said  trust, 
that  it  is  one  of  the  income  bonds  issued  under  and  described  in 
the  said  indenture  of  trust  or  general  mortgage. 
IN  WITNESS  WHEREOF,  the  said  Atchison  Company  has  caused  its 


240  MODERN   BUSINESS   CORPORATIONS. 

corporate  seal  to  be  hereto  affixed  and  these  presents  to  be  signed 
by  its  comptroller  or  a  deputy  comptroller,  and  attested  by  an  as- 
sistant treasurer,  on  this  first  day  of  July,  1889. 

ATCHISON,  TOPEKA  AND  SANTA  FE  RAILROAD  COMPANY, 

By Comptroller. 

Attest, Assistant  Treasurer. 

[On  the  back.] 

No Atchison,  Topeka  and  Santa  Fe  Railroad  Com- 
pany $500  five  per  cent,  income  gold  bond.  Principal  payable  July  1, 
1989.  Interest  non-cumulative,  payable  on  the  first  day  of  Septem- 
ber in  each  year  from  the  net  earnings  applicable  thereto.  Princi- 
pal and  interest  payable  at  the  agencies  of  the  company  in  the  cities 
of  Boston  or  New  York,  or  at  the  office  of  Baring  Brothers  &  Co-, 
London,  England. 

TRUSTEE'S  CERTIFICATE. — The  Union  Trust  Company  of  New  York 
hereby  certifies  that  this  bond  is  one  of  the  series  of  income  bonds 
issued  under  and  described  in  the  within  named  indenture  of  trust 
or  general  mortgage  to  this  company  as  trustee,  dated  October  15, 
1889. 

UNION  TRUST  COMPANY  OF  NEW  YORK,  Trustee. 
By ,  President. 

Notice! — No  writing  on  this  bond  except  by  an  officer  of  the  com- 
pany. 

DATE  OF  REGISTRY.  IN  WHOSE  NAME  REGISTERED.  TRANSFER  AGENT. 


[On  the  end,  one  hundred  coupons,  numbered  on  the  back,  and 
dated  each  first  of  September,  from  1890  to  1989,  the  face  of  the  first 
one  reading:] 

Coupon  No.  1 — On  the  first  day  of  September,  1890,  the  Atchison, 
Topeka  and  Santa  Fe  Railroad  Company  will  pay  to  bearer  in  gold 
coin  of  the  United  States  of  America,  or  its  equivalent,  at  its  agen- 
cies in  the  cities  of  Boston  or  New  York,  or  at  the  office  of  Messrs. 
Baring  Brothers  and  Company,  London,  England,  such  portion  of 
its  surplus  net  earnings,  if  any,  not  exceeding  twenty-five  dollars, 
as  shall  in  accordance  with  the  indenture  securing  the  same  be  then 
applicable  to  the  payment  of  interest  on  its  income  bond.  If  there 
be  no  surplus  net  earnings  applicable  thereto,  this  coupon  will  then 
uecome  void. — No GEORGE  L.  GOODWIN,  Assistant  Treasurer. 


FORMS.  241 


Form  22.     Receivers'  Certificate  of  Indebtedness. 

[Under  date  of  June  19,  1884,  the  following  order  was  issued  by 
the  Supreme  Court  of  New  York:  "It  is  ordered  that  Horace  Russell 
and  Theodore  Houston,  as  receivers  heretofore  appointed  in  this 
action,  be  and  they  hereby  are  authorized,  from  time  to  time,  to 
issue  and  sell,  at  a  price  not  less  than  par,  certificates  not  exceed- 
ing in  the  aggregate  five  million  dollars,  made  by  them  in  the  fol- 
lowing form,  the  blanks  being  filled: 

[Here  follows  the  form  given  below.]  It  is  further  ordered,  that 
said  receivers  be  and  they  hereby  are  authorized  to  immediately  is- 
sue and  sell  such  certificates  in  such  amounts,  not  exceeding  in  the 
aggregate  three  million  dollars,  as  may  seem  to  them  advisable. 

And  it  is  further  ordered,  that  said  receivers  be  and  they  hereby 
are  authorized  to  use  the  proceeds  of  said  certificates  in  their  dis- 
cretion to  pay  their  necessary  and  current  expenses  in  the  perform- 
ance of  the  duties  of  their  trust,  and  sums  now  due  to  companies 
operating  connecting  lines  of  railroad  upon  contracts  for  the  inter- 
change of  freight  or  passenger  business,  and  moneys  due  for  right 
of  way  and  depot  or  other  grounds  necessary  for  the  proper  man- 
agement and  operation  of  said  railroad,  and  moneys  due  or  to  be- 
come due  upon  the  rolling  stock  and  equipment  of  said  railroad 
which  must  necessarily  be  paid  to  retain  the  possession,  use  and 
ownership  thereof,  and  all  moneys  due  and  owing  by  the  defendant 
railway  company  for  labor  and  services  rendered  in  operating  said 
railroad  since  the  first  day  of  March,  1884,  and  money  due  for  sup- 
plies  purchased  and  used  by  said  defendant  in  carrying  on  its  busi- 
ness, and  for  rentals,  and  for  terminal,  ferry  and  depot  expenses 
subsequent  to  that  date,  whether  the  same  be  represented  by  notes, 
made  by  said  defendant,  or  not,  and  all  taxes  lawfully  imposed  upon 
the  property  of  said  defendant,  and  the  proper  expenses  of  said 
defendant  in  maintaining  its  organization  and  corporate  existence. 
Said  receivers,  however,  are  not  to  pay  out  for  right  of  way,  or 
depot  or  other  grounds,  any  sum  exceeding  in  the  aggregate  the 
sum  of  two  hundred  thousand  dollars,  nor  any  sum  for  rolling  stock 
or  other  equipment  exceeding  in  the  aggregate  the  sum  of  four 
hundred  thousand  dollars,  without  the  further  order  of  this  court. 

And  it  is  further  ordered,  that  said  receivers  be  and  they  are 
hereby  authorized  to  execute  and  deliver  all  necessary  lease-war- 
rants in  the  forms  and  at  the  times  required  by  the  existing  con- 
tracts for  the  purchase  of  rolling  stock  and  equipment  made  by  said 
defendant  railway  company. 

And  it  is  further  ordered,  that  the  certificates  issued  pursuant  to 
MOD.  Bus.  CORP.— 16 


242  MODERN   BUSINESS   CORPORATIONS. 

this  order  by  said  receivers  shall,  until  full  payment  therefor,  with 
interest,  be  a  lien  and  charge  on  all  the  property  covered  by  said 
mortgage  prior  to  the  lien  of  said  mortgage,  and  that  in  the  final 
order  herein,  before  the  discharge  of  said  receivers,  if  any  of  said 
certificates  have  not  previously  been  paid  by  said  receivers,  provi- 
sion shall  be  made  for  their  payment."  June  27,  1884,  the  court 
made  a  further  order,  including  the  following:  "And  the  said  re- 
ceivers be  and  they  hereby  are  authorized  and  directed,  until  the 
further  order  of  the  court  to  the  contrary,  to  keep  and  perform  on 
the  part  of  the  said  railway  company  all  covenants  and  agreements 
in  said  contracts  to  be  kept  and  performed  by  said  railway  com- 
pany, exactly  the  same  as  said  railway  company  ought  to  keep  and 
perform  the  same  according  to  the  terms  of  said  contracts  if  said 
receivers  had  not  been  appointed."] 

No $ 

NEW  YORK,  WEST  SHORE  AND  BUFFALO  RAILWAY  COMPANY. 

Receivers'  Certificate  of  Indebtedness. 

"This  is  to  certify,  that  the  bearer  hereof  is  entitled  to  receive 
from  Horace  Russell  and  Theodore  Houston,  and  their  successors,  as 
receivers  of  the  property  of  the  New  York,  West  Shore  and  Buffalo 
Railway  Company,  covered  by  the  first  mortgage  to  the  United  States 
Trust  Company  of  New  York,  as  Trustee,  but  not  personally,  the 
sum  of  dollars,  upon  the  production  hereof,  and  indorse- 
ment hereon  of  such  payments,  on  or  before  the  first  day  of  July, 
1887,  at  the  office  of  said  receivers  in  the  city  of  New  York,  and  in- 
terest thereon  from  the  date  hereof,  at  the  rate  of  six  per  centum 
per  annum,  payable  on  the  first  days  of  each  January  and  July,  un- 
less said  sum  and  interest  thereon,  as  aforesaid,  be  sooner  paid  by 
the  receivers  out  of  the  moneys  coming  into  their  hands,  from  time 
to  time,  applicable  thereto,  or  the  moneys  realized  by  them  upon 
the  sale  of  the  mortgaged  property  in  their  hands.  This  certificate 
is  one  of  a  series  of  certificates,  amounting  in  the  aggregate  to  a 
sum  not  to  exceed  five  million  dollars,  and  issued  or  to  be  issued 
under  the  authority  and  by  virtue  of  the  order  of  the  supreme  court 
of  the  state  of  New  York,  and  under  the  authority  and  by  virtue 
of  the  order  of  the  Circuit  Court  of  the  United  States  for  the  dis- 
trict of  New  Jersey,  in  equity,  and  for  the  purposes  and  objects 

therein  mentioned,  said  orders  being  made  on  the days  of 

June,  1884,  respectively  in  actions  in  said  courts,  wherein  United 
States  Trust  Company  of  New  York  is  plaintiff  and  complainant, 
and  said  railway  company  is  defendant.  Said  certificates  to  the 
amount  secured  thereby  are  hereby  declared  to  be  a  debt  of  the  re- 
ceivers incurred  for  the  benefit  and  protection  of  the  mortgaged 
property  in  their  hands,  and  until  full  payment  thereof,  to  be  a  lien 


FORMS.  243 

and  charge  thereon  prior  to  the  first  mortgage  and  the  interest 
thereon.  This  certificate  is  not  valid  until  countersigned  by  Frank- 
lin E.  Worcester,  treasurer  of  the  receivers. 

"IN  WITNESS  WHEREOF,  we,  as  receivers  aforesaid,  but  not  person- 
ally, have  signed  this  certificate  this day  of ,  one  thou- 

said  eight  hundred  and  eighty- 


"Receivers  of  the  property  covered  by  the  first  mortgage  of  the 
New  York,  West  Shore  and,  Buffalo  Railway  Company" 


Form  23.    Voting  Trust  Agreement. 

Whereas,  the  undersigned  stockholders  of  the  Com- 
pany deem  it  to  their  interest  that  all  the  stock  held  by  them  jointly 
shall  be  voted  as  a  unit  upon  all  questions  affecting  the  business  and 
management  of  the  said  company,  and; 

Whereas,   (naming  the  trustees)  have  consented  to 

hold  and  vote  such  stock  on  behalf  of  the  stockholders, 

IT  is  HEREBY  AGREED  by  and  between  the  above  named  and  under- 
signed stockholders  (hereinafter  called  "the  stockholders")  and 
the  above  named  trustees  (hereinafter  called  "the  trustees")  that 
for  a  valuable  consideration  the  receipt  whereof  is  hereby  acknowl- 
edged and  in  further  consideration  of  the  mutual  covenants  and 
agreements  expressed  in  this  instrument: 

The  stockholders  hereby  assign,  convey  and  transfer  unto  the 
trustees  the  number  of  shares  of  stock  of  the  Com- 
pany, a  corporation  of  the  state  of  set  opposite  their 

respective  names,  to  be  held  in  trust  by  the  said  trustees  for  the 
respective  stockholders,  by  whom  it  is  severally  assigned,  their  per- 
sonal representatives  and  assigns,  upon  the  following  terms  and 
conditions. 

I. 

The  said  trustees  shall  hold,  control  and  vote  said  stock  jointly 
as  if  they  were  collectively  the  joint  owners  of  all  of  said  stock. 

II. 

They  shall  determine  by  the  vote  of  the  majority  of  the  trustees 
then  in  office  how  said  stock  shall  be  voted  upon  any  question  at 
any  time  and  every  meeting  of  the  stockholders. 


244  MODERN   BUSINESS   CORPORATIONS. 

III. 

All  of  said  stock  so  held  by  the  trustees  shall  be  voted  as  a  unit  as 
decided  by  such  majority  vote  of  Ihe  trustees. 

IV. 

Any  vacancy  in  the  office  of  trustee  as  herein  provided  for,  caused 
by  death,  resignation  or  other  cause,  shall  be  filled  by  election  by 
the  remaining  trustees.  And  the  person  so  elected  shall  perform 
all  the  duties  and  exercise  all  the  powers  of  a  trustee  as  herein  pro- 
vided for. 

V. 

Said  trustees  shall  prepare  and  issue  to  the  stockholders  certifi- 
cates showing  the  amount  of  stock  held  on  behalf  of  each  stock- 
holder respectively.  And  the  stock  so  held  may  be  divided  and  trans- 
ferred in  like  manner  as  if  it  had  not  been  assigned  in  trust,  sub- 
ject to  the  rights  and  powers  of  the  trustees  under  this  assignment. 
But  no  such  assignment  or  transfer  of  stock  shall  be  effective  for 
any  purpose  until  after  surrender  of  the  certificate  issued  by  said 
trustees  and  the  issue  of  a  new  certificate  to  the  purchaser  or  as- 
signee thereof.  The  trustees  may  appoint  a  transfer  agent  for  the 
certificates  issued  by  them  and  prescribe  the  fees  which  shall  be 
paid  by  any  holder  or  owner  thereof  for  the  transfer  of  his  cer- 
tificate. 

VI. 

Said  trustees  shall  collect  and  receive  all  dividends  on  the  stock 
transferred  to  and  held  by  them  and  shall  immediately  pay  over  the 
same  to  the  holders  of  trust  certificates  representing  such  stock  as 
their  respective  interests  appear.  The  trustees  shall  not  demand  or 
receive  any  compensation  for  receiving  and  paying  over  such  divi- 
dends. 

VII. 

The  rights,  duties  and  powers  hereby  conferred  upon  said  trus 

tees  shall  expire  and  wholly  cease  on  the    day  of    

190 . . ,  and  the  trustees  shall  at  said  time  assign  and  transfer  to  the 
persons  who  then  hold  trustees'  certificates  evidencing  their  owner 
ship  of  shares  of  stock,  the  amount  of  stock  to  which  each  holdei 
thereof  is  shown  by  his  trustee's  certificate  to  be  entitled. 

VIII. 

Said  trustees  hereby  accept  the  trust  created  by  the  above  and 
foregoing  instrument,  and  hereby  undertake  to  hold,  own  and  vote 


FORMS.  245 

said  stock  as  therein  provided,  and  to  re-transfer  the  same  on  the 
day  of ,  to  the  holders  of  trustee's  certificates,  evidenc- 
ing their  right  to  receive  the  same.  They  further  undertake  at  all 
times  to  vote  the  said  stock  and  exercise  their  powers  as  trustees 
in  such  manner  as  they  shall  deem  to  be  for  the  best  interests  of  the* 

stockholders  of  the Company.   They  further  undertake 

to  accept  additional  assignments  of  stock  from  any  and  all  stock- 
holders of  the Company  and  to  permit  any  stockholder 

thereof  to  become  a  subscriber  to  this  agreement. 

IN  WITNESS  WHEREOF  the  subscribing  stockholders  and   trustees 

respectively  have  hereunto  set  their  hands  and  seals  this day 

of ,  190. .,  and  the  stockholders  have  set  opposite  their  names 

respectively  the  number  of  shares  of  stock  which  they  so  assign  and 
transfer  to  the  trustees. 

NAMES  OF  TRUSTEES.          NAMES  OF  STOCKHOLDERS.          NUMBER  OF  SHARES. 


Form  24.    Notice  of  Stockholders'  Annual  Meeting. 

Office  of  the Company,  No street, 

CHICAGO,  ILL.,  December  31,  1905. 
DEAR  SIR — Notice  is  hereby  given  that  the  annual  meeting  of 

the  stockholders  of  the Company  will  be  held  at  the  office  of 

the  company,  No street,  Chicago,  111.,  at  12  o'clock  M. 

on  Tuesday,  January  12,  1905,  for  the  election  of  directors  and  the 
transaction  of  such  other  business  as  may  come  before  the  meeting. 
The  stock  transfer  books  of  the  company  will  be  closed  at  5 
p.  M.  on  January  2,  1905,  and  remain  closed  until  the  end  of  said 
meeting  of  stockholders. 

JOHN  JOHNSON,  Secretary. 


Form  25.     Notice  of  Stockholders'  Special  Meeting. 

Office  of  the Company,  No street, 

CHICAGO,  ILL.,  September  1,  1905. 
Notice  is  hereby  given  that  pursuant  to  the  call  of  the  president 

a  special  meeting  of  the  stockholders  of  the  Company  will 

be  held  in  the  office  of  the  company,  No street,  Chi- 
cago, 111.,  at  2  o'clock  P.  M.  on  Tuesday,  September  12,  1905,  for  the 
purpose  of  considering  and  acting  on  a  proposed  resolution  author- 
izing the  issue  of  bonds  by  the  company  to  the  amount  of  $50,000 


246  MODERN   BUSINESS    CORPORATIONS. 

and  the  execution  of  a  mortgage  on  the  company's  property  secur- 
ing them,  a  copy  of  which  resolution  reads  as  follows:  (Here  recite 
the  resolution.) 

Also  for  the  transaction  of  any  and  all  business  pertaining  to, 
or  necessary  in  connection  with  the  issue  of  such  bonds  and  execu- 
tion of  such  mortgage. 

By  order  of  the  president. 

JOHN  JOHNSON,  Secretary. 

CINCINNATI,  OHIO,  September  5,  1905. 
JOHN  JOHNSON,  Secretary  of  the Company : 

DEAR  SIR — As  president  of  the   Company  I  hereby  call  a 

special  meeting  of  its  stockholders,  to  be  held  on  the  15th  day  of 
September,  1905,  at  12  o'clock  M.,  in  the  office  of  the  company, 
No street,  Cincinnati,  Ohio,  for  the  purpose  of  con- 
sidering and  acting  on  a  resolution  authorizing  the  issue  of  $50,000 
worth  of  company  bonds,  and  the  execution  of  a  mortgage  on  the 
company  property  to  secure  them,  a  copy  of  which  resolution  reads 
as  follows:  (Here  copy  the  resolution.) 

Also  for  the  transaction  of  any  and  all  business  pertaining  to  the 
execution  of  the  authority  conferred  by  said  resolution. 

You  will  please  send  the  necessary  notices  to  stockholders,  calling 
such  a  meeting  at  said  time  and  place. 

ROBERT  F.  GEORGE,  President. 


Form  26.    Stockholders'  Meeting — Waiver  of  Notice. 

The  undersigned,  being  all  the  stockholders  of  the  Com- 
pany, owning  respectively  the  number  of  shares  of  stock  set  oppo- 
site our  respective  names,  and  being  now  present  at  the  company's 
office,  do  hereby  consent  to  the  holding  of  a  meeting  of  the  stock- 
holders of  said  company  on  this  5th  day  of  September,  1905,  at 

3  P.  M.,  in  the  office  of  the  said  company,  No street, 

New  York,  for  the  purpose  of  considering  and  adopting  a  resolu- 
tion authorizing  the  change  of  the  name  of  said  company  to  the 
Company,  and  the  transaction  of  any  and  all  business  inci- 
dent thereto.  And  we  severally  waive  notice  of  such  meeting,  and 
consent  to  the  consideration  and  transaction  of  such  business. 

Witness  our  hands  this  5th  day  of  September,  1905. 

NAMES.  NUMBER    OF    SHARES    OWNED. 

JOHN    JONES 25  shares 

WILLIAM   MARKS 75  shares 

THOMAS   SMITH  . .  .100  shares 


FORMS.  247 

Form  27.     Simple  Proxy. 

I,  the  undersigned,  do  hereby  appoint  and  constitute 

my  true  and  lawful  attorney  in  fact  to  represent  me  at  any  and 

all  meetings  of  the  stockholders  of  the company  [held  on  or 

before  December  31,  1905]*  hereby  granting  him  full  power  and  au- 
thority to  act  for  me  at  such  meetings,  and  in  my  name  and  stead 
to  vote  the  stock  in  said  company  belonging  to  me  and  standing  in 
my  name  on  the  company's  books,  with  like  authority  and  effect 
as  I  might  do  if  personally  present  at  any  such  meeting. 

Witness  my  hand  and  seal  this day  of 1905. 

In  presence  of Signed  (Seal.) 


Form  28.    Proxy  for  a  Particular  Meeting. 

I,  the  undersigned,  do  hereby  appoint  and  constitute 

my  true  and  lawful  attorney  in  fact  to  represent  me,  and  to  act  in 
my  place  and  stead  at  the  annual  (or  special)  meeting  of  the  stock- 
holders of  the Company,  to  be  held  in  the  office  of  said  com- 
pany on  the day  of ,  1905,  pursuant  to  a  notice  hereto- 
fore given  by  the  secretary  of  said  company,  and  at  any  adjourn- 
ments thereof,  and  in  my  name  and  on  my  behalf  to  vote  any  and 
all  stock  in  said  company  belonging  to  me  and  standing  in  my  name 
on  its  books,  as  fully  and  with  like  effect  as  I  might  do  if  person- 
ally present  at  such  meeting.  •  , 

Witness  my  hand  and  seal  this day  of ,  1905. 

In  presence  of Signed  (Seal.) 


Form  29.    Proxy  for  Specific  Action. 

I,  the  undersigned,  do  hereby  appoint  and  constitute 

my  true  and  lawful  attorney  in  fact  to  attend  on  my  behalf  and  to 

represent  me  at  a  special  meeting  of  the  stockholders  of  the 

Company,  to  be  held  in  the  office  of  said  company  on  the day 

of 1905,  pursuant  to  a  notice  heretofore  given  by  the  secre- 
tary of  said  company,  and  in  my  name,  place  and  stead  to  cast  at 
said  meeting  any  and  all  votes  which  I  should  be  entitled  to  cast 
as  an  owner  of  stock  in  said  company  if  personally  present  thereat, 
in  favor  of  the  adoption  of  a  certain  resolution  for  issuing  $5,000,000 
of  corporation  bonds  and  mortgaging  the  company  property  to  se- 

*  By  omitting  the  words  in  brackets  the  proxy  will  become  un- 
limited as  to  time,  so  as  to  continue  in  force  until  revoked. 


248  MODERN  BUSINESS   CORPORATIONS. 

cure  the  same,  which  resolution  said  special  meeting  has  been  called 
to  consider.  And  I  hereby  ratify  and  confirm  any  and  all  votes  cast 
by  my  said  proxy  in  favor  of  the  adoption  of  said  resolution. 
IN  WITNESS  WHEREOF,  I  have  hereunto  set  my  hand  and  seal  this 

day  of ,  1905. 

In  presence  of Signed (Seal.) 

Form  30.     Oath  of  Inspectors  of  Election. 

The  statute  of  New  York  prescribes  a  form  of  oath  for  inspectors 
at  a  corporation  election  which  will  answer  in  other  states,  though 
more  specific  than  is  necessary  in  some  jurisdictions.    It  is  as  fol- 
lows: 
STATE  OF  NEW  YORK,  COUNTY  OF  NEW  YORK,  ss: 

We,  the  undersigned,  duly  appointed  to  act  as  inspectors  of  elec- 
tion at  the  annual  meeting  of  stockholders  of  the Company 

to  be  held  in  the  office  of  the  company,  No street,  in 

the  city  of  New  York,  on  the day  of 19 . . ,  being  sever- 
ally sworn,  depose  and  say,  and  each  for  himself  deposes  and  says, 
that  he  will  faithfully  execute  the  duties  of  inspector  of  election  at 
such  meeting  with  strict  impartiality  and  according  to  the  best  of 
his  ability. 

JOHN  SMITH, 
JAMES  JOHNSON. 

Subscribed  and  severally  sworn  to  before  me  this   day  of 

,  19 ..  MARTIN  SNOW, 

(Notarial  Seal.)  Notary  Public. 


Form  31.    Inspectors'  Certificate  of  Election. 

The  undersigned  inspectors  of  election,  duly  appointed  and  quali- 
fied, do  hereby  certify  that  at  the  regular  annual  meeting  of  stock- 
holders of  the Company,  held  at  the  office  of  said  company, 

No street,  New  York,  on  the  day  of  , 

19 . . ,  a  quorum  being  present,  we,  after  being  first  duly  sworn  by 
oath  hereto  annexed,  did  conduct  the  election  for  directors  of  said 
corporation,  and  that  the  vote  taken  thereat  resulted  in  the  election, 
by  the  plurality  set  opposite  their  respective  names,  of  the  follow- 
ing directors  to  serve  for  the  ensuing  year. 
NAMES.  VOTES  RECEIVED. 

JOHN   JOHNSON 125 

GEORGE  WILLIAMS 108 

CHARLES   WILSON.  .  .117 


FORMS.'  249 

Witness  our  hands  this day  of ,  19 ... 

WILLIAM  SPRUCE, 
JOHN  JACOBS. 
STATE  OF  NEW  YORK,  COUNTY  OF  NEW  YORK,  ss: 

Before  me,  a  notary  public,  on  this day  of ,  19 . . ,  per- 
sonally appeared  William  Spruce  and  John  Jacobs,  to  me  well 
known  to  be  persons  described  in  and  who  executed  the  foregoing 
certificate,  and  severally  acknowledged  that  they  executed  the  same 
for  the  uses  and  purposes  therein  set  forth. 

MARTIN  MARKS, 
(Notarial  Seal.)  Notary  Public  for  County  of  New  York. 

Form  32.    Notice  of  Election  as  Director. 

Office  of  the Company,  No street. 

INDIANAPOLIS,  IND.,  October  1, 1905. 
MR.  JAMES  M.  BURKE,  Chicago,  111. : 

DEAR  SIR — I  take  pleasure  in  notifying  you  that  the  board  of  di- 
rectors of  the Company,  at  a  special  meeting  held  on  Septem- 
ber 30,  1905,  elected  you  to  membership  in  said  board  to  fill  the  va- 
cancy caused  by  the  death  of  Mr.  Williams.  Please  signify  your  ac- 
ceptance of  the  office  at  your  early  convenience,  and  attend  the  next 
regular  meeting  of  the  board  on  October  6,  1905,  at  3  p.  M.,  in  the 
office  of  the  company.  Respectfully, 

JOHN  JOHNSON,  Secretary. 

Form  33.     Notice  of  Regular  Meeting  of  Directors. 

Office  of  the Company,  No street. 

NEW  YORK. 
Notice  is  hereby  given  that  the  regular  monthly  meeting  of  the 

board  of  directors  of  the Company  will  be  held  at  the  office 

of  the  company,  No street,  New  York,  at  2  p.  M.,  August 

4,  1905. 
Dated  July  25,  1905. 

JOHN  JOHNSON,  Secretary. 

Form  34.    Notice  of  Special  Meeting  of  Directors. 

Office  of  the Company,  No street. 

ST.  Louis,  Mo.,  August  28,  1905. 

Notice  is  hereby  given  that,  pursuant  to  the  call  of  the  president, 
there  will  be  a  special  meeting  of  the  board  of  directors  of  the 


250  MODERN   BUSINESS   CORPORATIONS. 

Company  at  2  p.  M.,  on  September  7,  1905,  in  the  office  of  the  com- 
pany, No street,  St.  Louis,  Mo.,  for  the  purpose  of 

electing  a  secretary  to  succeed  James  Burton,  recently  deceased, 
and  for  the  transaction  of  business  pertaining  to  such  election,  the 
entering  into  a  contract  with  the  person  so  elected  and  fixing  his 
salary. 

By  order  of  the  president. 

JOHN  JOHNSON,  Secretary. 


Form  35.    Directors'  Meeting — Waiver  of  Notice. 

The  undersigned,  being  all  of  the  directors  of  the Company, 

and  being  all  present,  do  hereby  consent  to  an  immediate  meeting 
of  the  board  of  directors  of  said  company,  at  2  p.  M.,  on  this  10th  day 

of  September,  1905,  in  the  office  of  John  Jones,  No 

street,  Cincinnati,  Ohio,  for  the  transaction  of  any  and  all  business 
pertaining  to  the  affairs  of  the  company  which  may  come  before 
such  meeting,  and  we  hereby  waive  notice  of  such  meeting. 

Witness  our  hands  this  10th  day  of  September,  1905. 

[Signed  by  all  the  directors.] 

Form  36.    Notice  of  Dividend. 

Notice  is  hereby  given  that  pursuant  to  a  resolution  of  the  board 
of  directors  of  the Company,  adopted  July  16,  1905,  a  semi- 
annual dividend  of  three  per  cent,  for  the  six  months  ending  June 
30,  1905,  will  be  paid  on  July  30,  1905,  to  the  holders  of  common 
(or  preferred)  stock  of  record  at  the  close  of  business  on  July  20, 
1905.  The  stock  transfer  books  will  be  closed  July  20,  1905,  at  5  p.  M., 
and  remain  closed  until  July  30,  1905,  at  10  A.  M. 

Philadelphia,  July  16,  1905. 

JOHN  JOHNSON,  Secretary. 

Form  37.    Procedure  for  Issuing  Bonds. 

'Whereas,  The  action  therein  provided  for  is  necessary  to  preserve 
and  advance  the  best  interests  of  this  corporation,  and 

Whereas,  This  meeting  has  been  regularly  called  after  due  notice 
for  the  purpose  of  considering  and  adopting  or  rejecting  the  follow- 
ing resolutions;  be  it 

Resolved,  That  a  meeting  of  all  the  stockholders  of  the  Maine 
and  Washington  Railway  Company  be  and  the  same  is  hereby 
called  to  be  held  at  the  main  office  and  principal  place  of  business 


FORMS.  251 

of  said  company  in  room  in  building,  No 

street,  in  the  city  of  on  the day  of  No- 
vember, 1905,  at  11  o'clock  A.  M.,  for  the  purpose  of  considering  and 
acting  upon  a  proposition  to  issue  mortgage  bonds  of  said  company 
to  the  amount  of  fifteen  million  dollars  ($15,000,000),  payable  in 
gold  coin  of  the  United  States,  for  the  purpose  of  paying  off  and 
taking  up  the  outstanding  bonded  indebtedness  of  said  company  to 
the  amount  of  eight  million  dollars  ($8,000,000),  paying  existing 
floating  indebtedness  of  said  company  to  the  amount  of  two  million 
dollars  ($2,000,000)  and  providing  a  fund  of  five  million  dollars  for 
use  in  making  improvements,  extensions  and  betterments  of  and 
upon  the  property  of  said  railroad  company,  and  thereby  to  in- 
crease its  bonded  indebtedness  up  to  the  aggregate  amount  of  fifteen 
million  dollars  ($15,000,000)  in  gold  coin  of  the  United  States,  and 
to  secure  the  payment  of  said  bonds  by  mortgage  upon  the  railroads, 
rights  of  way  and  certain  properties  belonging  to  said  company  as 
particularly  described  in  a  mortgage  heretofore  prepared  for  sub- 
mission to  and  consideration  by  said  meeting  of  stockholders. 

Resolved,  That  the  secretary  of  this  company  shall  cause  to  be 
published  in  the  ,  a  newspaper  of  general  circulation  pub- 
lished in  the  city  of [where  the  meeting  is  to  be  held] 

at  least  once  each  week  for  eight  weeks,  beginning  on  the  

day  of ,  instant,  a  notice  to  the  stockholders  of  said  Maine  and 

Washington  Railway  Company,  stating  the  time,  place  and  object 
of  holding  said  meeting,  which  notice  shall  be  in  substantially  the 
following  form: 

Notice  is  hereby  given  that,  pursuant  to  a  resolution  of  the  board 
of  directors  of  the  Maine  and  Washington  Railway  Company  unani- 
mously adopted  at  a  full  meeting  of  the  said  board,  duly  called  for 
that  purpose  and  held  at  the  principal  office  of  the  company  on  the 

day  of ,  19. .,  a  special  meeting  of  all  the  stockholders 

of  the  said  Maine  and  Washington  Railway  Company  will  be  held 

at  the  principal  office  of  said  company  in  room  in  .• 

building  at  No street  in  the  city  of  , 

state  of  ,  on  the  day  of  November,  1905,  at  11 

o'clock  A.  M.,  for  the  purpose  of  considering  and  acting  upon  a  propo- 
sition to  issue  mortgage  bonds  of  said  company  to  the  amount  of 
fifteen  million  dollars  ($15,000,000),  for  the  purpose  of  taking  up 
outstanding  bonds  of  said  company,  paying  its  floating  debts,  and 
providing  a  fund  to  pay  for  extensions  and  betterments  of  the  rail- 
road properties  of  said  company,  thereby  increasing  the  bonded  in- 
debtedness of  said  company  to  the  aggregate  amount  of  fifteen  mil- 
lion dollars  ($15,000,000)  and  to  secure  such  bonds  to  be  so  issued 
by  a  mortgage  upon  the  railroads,  rights  of  way  and  certain  prop- 


252  MODERN   BUSINESS   CORPORATIONS. 

erties  belonging  to  said  company  as  described  in  a  mortgage  to  be 
submitted  to  said  meeting  for  its  action  thereon.  By  order  of  the 
board  of  directors  this day  of ,  19 . . 

(Corporate  Seal.)  R.  M.  JONES, 

Secretary  of  the  Maine  &  Washington  Railroad  Company. 

Resolved,  That  the  secretary  of  this  company  shall  cause  a  suffi- 
cient number  of  like  notices  to  be  prepared  in  the  form  of  letters 
or  circulars,  and  shall  send  by  mail,  properly  stamped  and  addressed, 
at  least  thirty  days  before  the  date  fixed  for  said  meeting,  one  such 
notice  to  each  stockholder  whose  name  appears  as  such  on  the  com- 
pany's books,  such  notice  to  be  addressed  to. the  stockholder  at  his 
place  of  residence,  if  shown  by  the  books  of  the  company  or  other- 
wise known,  and  if  his  residence  be  not  known,  addressed  to  him 
at  the  principal  place  of  business  of  the  company. 

Form  38.    Indemnity  Bond  for  Reissue  of  Lost  Stock  Certificate. 

The  undersigned,  George  Burton  and  the  Fidelity  Surety  Company, 
hereby  acknowledge  ourselves  as  held  and  firmly  bound  unto  the 
Motive  Power  Company  of  New  York  in  the  sum  of  ten  thousand 
dollars  ($10,000),  for  the  payment  of  which  to  the  said  corporation, 
its  successors  and  assigns,  we  jointly  and  severally  bind  ourselves, 
our  heirs,  executors,  administrators  and  successors. 

Signed  and  sealed  by  us  this day  of ,  19. ..  The  con- 
dition of  the  above  obligation  is  as  follows: 

Whereas,  The  said  George  Burton  is  recorded  on  the  transfer 
books  of  said  Motive  Power  Company  of  New  York  as  the  owner  of 
fifty  (50)  shares  of  the  capital  stock  of  the  said  company,  and 

Whereas,  His  original  certificate  of  stock  No.  3,  issued  by  said  com- 
pany, evidencing  his  ownership  of  said  fifty  shares  of  stock  has 
been  lost,  stolen  or  destroyed,  as  he  has  complained  to  said  company, 
and 

Whereas,  Upon  application  of  the  said  George  Burton  and  pursu- 
ant to  a  resolution  of  the  board  of  directors  of  the  said  Motive 
Power  Company  of  New  York  granting  the  same,  a  new  certificate 
for  the  said  fifty  shares  has  been  this  day  issued  to  said  George  Bur- 
ton and  numbered  57; 

Now,  Therefore,  If  the  said  George  Burton,  his  heirs,  executors 
and  administrators  shall  now,  and  at  all  times  hereafter,  save,  de- 
fend, keep  harmless  and  indemnify  the  said  Motive  Power  Company 
of  New  York,  its  legal  representatives,  successors  and  assigns  from, 
against  and  on  account  of  all  demands,  claims  or  causes  of  action 
arising  out  of,  upon,  or  connected  with  said  certificate  No.  3,  for 
said  fifty  shares  of  stock  in  said  company,  or  any  actual  or  pre- 


FORMS.  253 

tended  purchase  or  assignment  thereof,  and  from  all  costs,  expenses 
and  damages  that  shall  or  may  arise  therefrom,  and  shall  also  sur- 
render and  deliver  up  to  said  company  for  cancellation  the  said  cer- 
tificate No.  3,  whenever  and  so  soon  as  it  may  be  found,  then  this 
obligation  shall  be  void.  Otherwise  in  full  force  and  effect. 

GEORGE  BURTON, 
THE  FIDELITY  SURETY  COMPANY. 

By  M.  A.  ALLEN,  General  Agent. 

Signed,  sealed  and  delivered  in  presence  of  Arthur  R.  Morgan, 
Joseph  Harper. 

Form  39.     Resolution  of  Consolidation. 

Whereas,  It  is  the  sense  of  this  board  that  the  consolidation  of  the 
A.  Company,  the  B.  Company  and  the  C.  Company  to  form  a  single 
corporation,  and  the  consolidation  and  amalgamation  of  their  re- 
spective capital  stocks,  properties  and  franchises  will  be  mutually 
advantageous,  and 

Whereas,  The  holders  of  more  than  three-fourths  in  value  of  all 
the  capital  stock  of  each  of  said  companies  have  consented  in  writ- 
ing to  a  consolidation  of  the  said  A.  Company,  B.  Company  and  C. 
Company  upon  the  terms  following,  to  wit: 

First.  That  said  consolidation  shall  take  place  at  once,  and  the 
consolidated  corporation  shall  continue  in  existence  for  fifty  years. 

Second.  That  the  consolidated  corporation  shall  bear  the  name  of 
the  A.  Company. 

Third.  That  the  consolidated  corporation  shall  take  over  and  be- 
come the  owner  of  all  the  lands,  properties,  franchises  and  assets 
of  every  description  belonging  to  each  of  said  constituent  com- 
panies; shall  assume,  become  liable  for,  pay  and  discharge,  all  valid 
debts,  liabilities  and  obligations  of  every  kind,  character  and  de- 
scription, heretofore  incurred  or  entered  into  by  either  and  all  of 
said  constituent  companies;  shall  hold  said  property  and  franchises 
subject  to  all  the  -valid  conditions,  liens  and  claims  to  which  the 
same  were  and  are  subject  in  the  hands  of  the  several  constituent 
companies;  and  shall  assume,  undertake  and  perform  all  contracts, 
agreements  and  undertakings  to  which  any  and  all  of  said  constitu- 
ent companies  are  lawfully  bound  to  the  same  extent  and  in  like 
manner  as  such  constituent  company  or  companies  are  bound  to 
keep  and  perform  the  same. 

Fourth.  That  the  objects  and  purposes  of  the  consolidated  com- 
pany shall  be  made  to  embrace  the  objects  and  purposes  of  all  the 
three  constituent  corporations. 

Fifth.    That  the  consolidated  company  shall  have  a  board  of  di- 


254  MODERN   BUSINESS   CORPORATIONS. 

dectors  equal  in  number  to  the  combined  boards  of  the  three  con- 
stituent companies,  and  its  directors  for  the  first  year  shall  be  all 
the  directors  of  all  of  said  companies. 

Sixth.  That  its  principal  place  of  business  shall  be  that  of  the  A. 
Company. 

Seventh.  That  the  capital  stock  of  said  consolidated  company 
shall  consist  of  one  hundred  thousand  (100,000)  shares  of  one  hun- 
dred dollars  ($100)  each,  and  shall  be  issued  to  shareholders  in  the 
constituent  companies  (upon  surrender  of  their  shares  of  stock 
therein)  in  the  proportion  that  such  shares  held  by  them  respectively 
shall  bear  to  the  combined  capital  stocks  of  all  the  said  constituent 
companies. 

Be  it  resolved,  that  the  propositions  and  conditions  above  recited 
are  hereby  accepted  and  adopted  by  the  board  of  directors  of  the 
company. 

NOTE — There  is  no  branch  of  law  that  is  more  intricate  than  the 
law  of  corporations.  Forms,  at  best,  can  only  be  suggestive.  They 
must  be  in  harmony  with  the  purposes  of  the  incorporators  and  the 
rights  granted  by  law.  It  would  be  possible  to  make  a  large  volume 
of  forms  for  procedure  in  the  organization  and  management  of  pri- 
vate corporations  without  being  able  to  furnish  forms  wholly  appli- 
cable in  any  given  instance.  The  forms  given  herein  are  merely  il- 
lustrative and  must  be  adapted  through  changes  to  the  uses  for 
which  the  corporation  lawyer  or  officer  intends  them. 


PART  X. 

MISCELLANEOUS, 


255 


MISCELLANEOUS. 

TEUSTS  AND  VOTING  TKUSTS. 

In  the  strict  legal  sense  of  the  word  there  are  not  now  such 
things  in  existence  in  America  as  trusts,  that  form  of  combina- 
tion having  become  illegal  after  the  passing  by  congress  of  the 
federal  anti-trust  act,  known  as  the  Sherman  law,  which  was 
approved  in  1890.  The  trust  form  of  combination  was  different 
from  the  present  form  of  mammoth  centralized  corporations. 
"The  several  firms  and  corporations  which  sought  to  combine 
their  interests  did  not  merge  them  into  one  corporation,  nor 
sell  them  to  any  one  individual  or  set  of  individuals.  On  the 
contrary,  the  several  properties,  whether  corporate  or  individual, 
remained  in  equity  distinct,  but  they  were  all  transferred  in 
trust  to  a  certain  few  persons  as  trustees  to  manage  them  in  the 
interests  of  the  several  owners.  The  value  of  the  respective 
properties  was  ascertaineH,  and  the  trustees  issued  trustees'  cer- 
tificates to  the  owners  for  their  respective  proportionate  shares 
in  the  aggregate  of  the  property  turned  over  to  the  trustees.  In 
some  cases  all  the  stock  of  the  corporations  was  transferred  to 
the  trustees ;  in  others,  only  a  majority  of  the  shares ;  but  what- 
ever the  extent  of  the  interest,  enough  of  it  was  turned  over  to 
the  trustees  to  give  them  control  of  the  several  properties. 
There  was  one  management,  one  policy  and  one  great  combina- 
tion, so  far  as  production  or  marketing,  price  making,  or  profit- 
sharing  was  concerned.  Still  the  beneficial  title  to  all  these 
properties  remained  in  their  several  owners.  The  different  sub- 
sidiary corporations  were  still  distinct."*  This  form  combined 
a  maximum  of  control  with  a  minimum  of  financial  responsi- 

*The  Trusts,  by  William  Miller  Collier. 
MOD.  Bus.  CORP. — 17 

257 


258  MODERN   BUSINESS    CORPORATIONS. 

bility.  The  consolidated  corporations  (folding  corporations") 
and  the  pools  and  other  forms  of  unincorporated  association  of 
to-day  have  practically  the  same  purposes  and  effect  the  same 
results,  but  they  have  a  different  standing  in  the  law.  In  the 
case  of  holding  corporations  the  original  corporations  manage 
their  individual  business  affairs.  But,  like  a  private  person  who 
owns  the  majority  of  the  stock  of  two  competing  corporations 
and  elects  directors  who  will  bring  about  uniform  management 
of  the  two  plants,  the  holding  corporation  owns  a  majority  of 
the  stock  of  the  constituent  corporations  and  elects  their  di- 
rectors, thus  keeping  entire  control.  The  holding  corpora- 
tion usually  issues  its  stock  proportionately  to  those  interested 
in  the  component  corporations  in  exchange  for  a  majority  or  all 
of  the  stock  of  those  corporations.  The  results  of  this  form 
of  combination  are,  of  course,  uniform  control,  monopoly,  and 
often  the  destruction  of  small  competing  corporations.  Not- 
withstanding the  derivation  of  the  word  "trust,"  its  meaning 
has  been  extended  to  cover  these  other  forms  of  combination. 
Mr.  S.  C.  T.  Dodd,  solicitor  for  the  Standard  Oil  Company, 
has  defined  "trust"  in  its  broader  sense  thus :  "The  term  'trust' 
embraces  every  act,  agreement,  or  combination  of  persons  or 
capital  believed  to  be  done,  made,  or  formed,  with  the  intent, 
power  or  tendency  to  monopolize  business,  to  restrain  or  inter- 
fere with  competitive  trade,  or  to  fix,  influence,  or  increase  the 
prices  of  commodities."* 

The  voting  trust  is  a  device,  permitted  by  the  laws  of  some 
states,  the  object  being  to  maintain  an  agreed  policy  which  can- 
not be  interrupted  by  the  sale  of  shares  of  individuals.  Holders 
of  a  majority  of  shares  enter  into  an  agreement  to  transfer  their 
shares  to  a  trustee,  who  has  the  power  to  vote  them,  and  thereby 
elect  the  directors  and  control  the  management  and  policy  of 
the  corporation,  f  The  trustees  issue  to  the  shareholders,  in 
exchange  for  their  shares,  trust  certificates,  which  are  usually 
made  transferable  the  same  as  stock.  The  holders  of  these  certifi- 


"Harvard  Law  Series,  Nov.  1893. 
tSee  Dill,  New  Jersey  Corporations. 


TRUSTS  AND  VOTING  TRUSTS.  259 

cates  reserve  the  right  to  draw  dividends.  The  duties  of  the  trus- 
tee are  fixed  by  the  trust  agreement,  which  recites  the  policy  to 
be  pursued.  This  device  is  sometimes  used  as  a  protective  meas- 
ure by  small  corporations  to  prevent  their  absorption  or  control 
by  a  holding  corporation  which  might  buy  a  majority  of  the 
stock  and  convert  the  smaller  corporation  to  its  own  uses. 

Voting  trusts  have  been  upheld  in  decisions  by  courts  in  New 
York,  New  Jersey,  Massachusetts,  Alabama,  Illinois  and  Cali- 
fornia, and  they  have  been  declared  illegal  in  some  other  states. 
Cook  on  Corporations  (pp.  1369-1371)  gives  the  following  con- 
clusion, after  reviewing  the  decisions :  "  *  *  a  deposit  of  cer- 
tificates of  stock  with  trustees  for  a  specified  period  of  time, 
either  with  or  without  a  transfer  of  the  same  to  the  trustees,  is 
legal,  and  not  in  violation  of  the  usual  statute  against  restraints 
on  the  alienation  of  personal  property,  and  is  not  opposed  to 
public  policy,  as  a  restraint  upon  trade,  and  is  not  an  implied 
fraud  upon  stockholders  who  are  not  allowed  to  participate,  and 
it  is  not  an  illegal  separation  of  the  voting  power  from  the 
ownership  of  the  stock,  provided,  always,  that  no  actual  fraud 
is  involved  in  the  transaction.  In  other  words,  such  a  pooling 
of  stock  is  not  illegal  in  itself,  but,  like  all  contracts,  may  be 
illegal  if  actual  fraud  is  involved/' 


CORPORATION  RECEIVERSHIPS. 

Receivers  are  appointed  for  corporations  when  necessary  to 
protect  the  interests  of  creditors,  stockholders,  or  the  state.  The 
appointment  of  a  receiver  is  usually  incidental  to  some  other  re- 
:  lief  asked  in  a  suit  against  the  corporation  or  its  officers. 

The  most  frequent  cause  for  appointing  a  receiver  is  insolv- 
ency of  the  corporation.  If  it  makes  default  in  payment  of  the 
principal  or  interest  of  a  mortgage  debt,  and  suit  is  brought  to 
foreclose  the  mortgage,  a  receiver  may  be  appointed  to  preserve 
the  property  and  conduct  the  business  until  property  and  busi- 
ness can  be  sold  for  the  payment  of  debts.  The  same  action  will 
be  taken  where  there  has  been  long  delay  in  the  payment  of  a 
judgment.  And  even  when  suit  is  brought  for  a  simple  debt  a 
receiver  may  be  appointed  if  it  appears  that  there  are  other  debts 
exceeding  the  company's  ability  to  pay,  which  make  a  receiver- 
ship necessary  to  prevent  the  seizure  of  the  corporate  property 
by  piecemeal  and  the  consequent  destruction  of  a  valuable  busi- 
ness. 

When  the  charter  of  a  corporation  is  forfeited  and  the  cor- 
poration is  dissolved  by  order  of  court  in  quo  warranto  proceed- 
ings on  behalf  of  the  state,  a  receiver  is  appointed  by  the  court 
for  the  three-fold  purpose  of  restraining  the  corporation  from 
using  the  forfeited  franchise,  providing  for  the  satisfaction  of 
corporation  debts,  and  preserving  the  corporation  property  for 
the  use  of  the  stockholders,  who,  by  the  dissolution  of  the  cor- 
poration, become  tenants  in  common  in  its  surplus  effects.  In 
like  manner  a  receiver  may  be  appointed  when  the  charter  of  a 
corporation  expires. 

A  stockholder  of  a  corporation  may  procure  the  appointment 
of  a  receiver  by  showing  that  its  affairs  are  being  fraudulently 
mismanaged  by  the  corporation  officers,  or  that  the  business  is 

260 


CORPORATION   RECEIVERSHIPS.  261 

being  operated  at  a  loss  or  is  so  heavily  indebted  that  its  prop- 
erty is  liable  to  be  seized  and  wasted  by  creditors  or  that  the  com- 
pany has  voluntarily  ceased  business,  and  that  the  interests  of 
stockholders  are  not  being  properly  cared  for,  or  by  showing  any 
sufficient  cause  for  dissolving  the  corporation. 

Public  service  corporations,  such  as  railroad  companies,  street 
railroad  companies,  water  companies  and  gas  companies,  are 
sometimes  placed  in  the  hands  of  receivers  on  the  application  of 
patrons  to  safeguard  the  interests  of  the  public,  which  depends 
on  the  performance  of  their  franchise  duties  for  transportation, 
water,  light,  heat,  etc. 

The  appointment  of  a  receiver  is  made  by  the  court  upon  the 
application  of  a  party  having  legal  rights  which,  he  shows  the 
court,  will  suffer  unless  there  is  a  receivership.  The  general  rule 
is  that  the  petitioner  must  make  a  prima  facie  showing  that  he 
has  a  cause  of  action  for  some  substantial  relief,  as  the  mortgagee 
for  the  foreclosure  of  his  mortgage,  the  general  creditor  to  re- 
cover a  judgment,  the  attorney-general  for  a  forfeiture  of  the 
charter,  the  stockholder  for  a  distribution  of  the  company  prop- 
erty, or  a  citizen  for  the  performance  of  a  public  service.  The 
existence  of  the  cause  of  action,  and  also  the  existence  of  special 
facts  which  make  a  receivership  necessary,  must  be  established 
by  affidavits  or  other  evidence,  depending  on  the  local  rules  of 
practice. 

Notice  to  the  corporation  through  its  officers  is  usually  neces- 
sary before  the  court  will  appoint  a  receiver.  This  notice  must 
be  given  for  such  a  reasonable  time  as  will  enable  the  company's 
officers  to  oppose  the  application  if  they  wish  to  do  so.  What  is 
a  reasonable  time  will  depend  on  the  facts  of  each  case.  If  it  is 
shown  by  affidavits  that  the  interests  of  the  complaining  party 
will  suffer  by  delay,  as  where  the  officers  are  charged  with  selling 
the  corporation  property  with  the  intention  of  converting  it  to 
their  own  use,  or  carrying  it  away  beyond  the  jurisdiction  of  the 
court,  a  temporary  receiver  may  be  appointed  immediately  to 
take  charge  of  the  corporation  property  and  business  until  no- 
tice can  be  given  and  the  party  afforded  a  hearing  on  the  ques- 
tion whether  or  not  the  receivership  shall  be  made. 


CORPORATE  CREDIT. 

Bonds  are  long-time  paper  whose  value  is  based  on  a  corpo- 
ration's readiness  and  ability  to  pay  interest  and  principal,  as 
has  been  shown.  Not  all  corporations  issue  bonds,  nor  do  all 
corporations  that  have  bond  issues  outstanding  exhaust  all  their 
proper  credit  thereby.  It  has  been  stated  as  a  principle  that 
bonds  should  not  be  issued  to  an  amount  which  will  exceed  the 
value  of  a  corporation's  property  in  times  of  adversity.  The 
same  principle  extends  to  borrowing  money  on  short  time,  or 
commercial  paper,  one  reason  being  that  it  is  poor  financial 
practice  to  sell  evidences  of  indebtedness  at  a  heavy  discount, 
which  is  necessary  when  the  security  is  insufficient.  And  when 
there  is  a  bond  issue  that  does  not  cover  an  amount  equal  to  a 
conservative  estimate  of  the  value  of  a  corporation's  property, 
commercial  paper  may  often  be  issued  advantageously  to  the 
limit  fixed  by  the  estimate.  Short-time  paper  issued  beyond  this 
estimate  is  not  completely  secured,  since,  except  when  it  is  given 
in  exchange  for  employes'  services,  which  are  constituted  by 
statute  a  prior  lien,  it  comes  after  the  bond  claims  in  the 
distribution  of  the  assets  of  a  corporation.  To  pay  current  ex- 
penses and  to  supply  operating  funds  till  the  indebtedness 
for  merchandise  credit  extended  to  patrons  is  satisfied  by  pay- 
ment, business  concerns  must  often  borrow  money  from  the 
banks.  When  interest  rates  are  low,  and  for  other  reasons, 
it  is  often  better  to  do  this  than  to  raise  funds  by  'selling 
bonds  or  preferred  stock.  But  banks  must  be  satisfied  of  the 
security  of  a  corporation's  paper  before  they  will  extend  credit. 
A  conservative  bank  will  require  trustworthy  evidence  of  the 
resources  of  a  corporation  and  knowledge  of  the  character  of 
the  corporation's  officers  and  directors.  The  ability  of  the  corpo- 
ration to  pay  its  notes  and  its  reputation  for  promptly  meeting 

262 


CORPORATE   CREDIT.  263 

all  its  obligations  will  determine  its  ability  to  secure  credit  in 
case  it  is  not  borrowing  on  salable  collateral  securities.  The 
bank  must  know  that  it  can  force  payment  in  case  of  default, 
and  it  endeavors  to  learn  as  nearly  as  may  be,  by  investigating 
the  reputation  of  the  corporation  for  promptness  or  slowness  in 
settling  its  previous  indebtedness,  that  it  will  not  have  to  incur 
the  expense  of  forcing  payment.  No  corporation  can  afford  a  bad 
reputation  in  either  of  these  respects.  It  is  in  danger  of  being 
forced  into  dissolution  if  it  has  debts  it  cannot  pay,  and  if  it  is 
able  but  unwilling  to  satisfy  its  creditors,  it  will  have  difficulty 
in  securing  loans  in  the  future.  A  corporation  may  measure  its 
financial  stability  in  a  degree  by  its  ability  to  fill  out  satisfacto- 
rily enough  to  obtain  a  loan  from  a  conservative  bank  the  stand- 
ard form  of  report  recommended  by  the  American  Bankers'  As- 
sociation. This  form  of  report  is  reprinted  here  in  full.  Many 
of  the  best  banks  in  American  cities  use  this  form,  and  all  cor- 
porations applying  for  loans  must  be  able  to  fill  it  out  to  the 
bank's  satisfaction.  It  is  well  for  a  corporation  with  a  likely 
need  of  borrowing  money  to  secure  a  "line  of  credit."  Having 
a  line  of  credit  means  that  the  corporation  may  secure  any 
needed  credit  at  its  bank  up  to  a  certain  amount,  which  amount 
is  determined  by  the  report  submitted.  In  small  cities  and 
towns  the  bankers'  personal  knowledge  of  their  patrons  and 
their  patrons'  business  usually  makes  unnecessary  such  elabo- 
rate statements. 

Among  many  banks  another  consideration  determines  the 
amount  a  company  may  borrow,  i.  e.,  the  value  of  the  com- 
pany's business  to  the  bank.  In  New  York  a  company  generally 
is  allowed  to  borrow  five  times  the  amount  of  its  average  de- 
posit, provided  other  conditions  are  right.  In  the  west  this 
rule  is  not  adhered  to,  but  the  practice  of  western  banks  is  tend- 
ing more  in  that  direction. 


264 


MODERN   BUSINESS    CORPORATIONS. 


Standard  Form 

American  Hankers*  Association 
To  the  Capital  Rational  Bank  of  Indianapolis : 

Name  (Corporate  style  under  charter) 


Business 

Location Branches 

For  the  purpose  of  procuring  credit  from  time  to  time  from  you  for  our  negotiable 
paper  or  otherwise,  we  furnish  you  with  the  following  statement,  which 

fully  and  truly  sets  forth  our  financial  condition  on  the day  of 

1 .... ;  which  statement  you  can  consider  as  continuing  to  be  full  and  accurate  unless 
notice  of  change  is  given  you.  We  agree  to  notify  you  promptly  of  any  change 
that  materially  reduces  our  pecuniary  responsibility. 

In  consideration  of  the  granting  of  such  credit,  we  agree  that  if  we  at  any  time  stop 
payment  or  become  insolvent,  or  commit  an  Act  of  Bankruptcy,  or  if  any  of  the 
representations  made  below  prove  to  be  untrue,  or  if  we  fail  to  notify  you  of  any 
material  change  as  before  agreed,  then  and  in  either  such  case  all  our  obligations 
held  by  you  shall  immediately  become  due  and  payable  without  demand  or  notice, 
and  the  same  may  be  charged  against  the  balance  of  any  deposit  account  kept  by  us 
with  you,  we  hereby  giving  a  continuing  lien  upon  such  balance  of  deposit  account 
from  time  to  time  existing  to  secure  all  our  obligations  held  by  you. 


ASSETS 


Cash  in Bank 

Cash  on  Hand 

Bills  Receivable,  Good. .. 
AccountsReceivable.Good 
Bills  or  Accounts  Receiv- 
able, Owing  by  Officers 

Merchandise,  Finished 
(How  Valued ) 

Merchandise,  Unfinished 
(How  Valued ) 

Eaw  Material,  (How 
Valued ) 

Real  Estate 

Machinery  and  Fixtures.. 


Total 


LIABILITIES 


Bills  Payable  for  Mer- 
chandise   

Bills  Payable  to  Own 
Banks 

Bills  Payable  for  Paper 
Sold.... 

Open  Accounts 

Bonded  Debt(  When  Due.) 

Interest  on  Bonded  Debt. 

Mortgages  or  Liens  on 
Real  Estate 

Chattel  Mortgages 

Deposits  of  Money  with  us 


Total  Liabilities.... 
Capital 

Surplus,  Including  Undi- 
vided Profits 


Total 


(Accommodation  Endorsements 

Contingent  Liability.  \ 

(  Endorsed  Bills  Receivable  Outstanding 

Specify  any  of  above  assets  or  liabilities  pledged  as,  or  secured  by,  collateral,  and 
state  collateral. 


(Over.) 


CORPORATE   CREDIT.  265 

CAPITAL 

Authorized Subscribed Paid  in 

Held  by  Company  as  Treasury  Stock 

How  paid  in :  Cash  $ Other  Property 

Description  of  other  property  and  how  valued 

What  portion  of  Real  Estate,  if  any,  has  been  acquired  through  bad 

debts? 

In  whose  name  is  title  to  Real  Estate  held 

Incorporated  in  what  State  and  under  what  general  Law  or  Special 

Act 

Date  of  Charter Commenced  Business 

Are  Stockholders  liable  beyond  amount  of  stock  subscribed 

If  so,  to  what  extent 

Amount  of  annual  business Annual  Expenses 

Annual  Dividends 

When  was  last  Dividend  declared Rate 

Insurance  carried  on  Merchandise Real  Estate 

Is  Mortgage  above  stated  a  first  lien  on  all  the  assets 

Regular  times  of  taking  inventory 

Give  basis  of  statement,  whether  actual  in- 
ventory, by  whom  taken  and  date,  or 

estimate,    by    whom  made  and  date. 
What  amount,  if  any,  of  Accounts  and  Bills  Rec.,  not  charged  off,  is 

past  due,  extended  or  renewed 

Amount  charged  off  for  bad  debts  last  year 

Amount  recovered  during  same  period 

Amount  charged  off  account  of  plant  preceding  year 

State  last  date  of  taking  trial  balance  and  if  same  proved 

Regular  times  of  balancing  books 

Number  of  Bank  Accounts  and  where  kept '. 


OFFICERS 


NAME  IN  PULL 


President, 

Vice-President, 

Secretary,  

Treasurer,  


ADDRESS 


DIRECTORS 


NAME  IN  FULL 


ADDRESS 


Please  sign  Company's  Name  here. 

By. 
Date  Signed 


266  MODERN   BUSINESS   CORPORATIONS. 

The  foregoing  statement  has  value  to  the  extent  that  it  is 
accurately  made.  Such  a  report  made  by  an  unintelligent  and 
careless  or  dishonest  bookkeeper  or  clerk  may  be  very  misleading. 
James  G.  Cannon  recommends  that  the  custom  be  established 
of  requiring  that  statements  of  financial  condition  of  factories 
be  accompanied  by  the  joint  certificates  of  a  certified  public  ac- 
countant and  of  an  expert  engineer.  The  accountant  will  have 
concerned  himself  with  the  books  and  records  of  the  corporation, 
and  the  engineer  will  have  concerned  himself  with  the  physical 
properties — with  the  value  of  the  plant,  with  the  plant's  adapta- 
bility to  its  use,  with  the  value  of  raw  materials,  and  with  trade 
conditions,  etc.  The  banker  then  has  the  sense  of  security  due 
to  the  disinterested  and  impartial  nature  of  the  reports  and 
valuations. 


MARKETING  NOTES  IN  THE  OPEN  MARKET. 

The  amount  a  company  can  borrow  from  a  bank  depends  upon 
several  considerations — the  company's  credit,  the  value  of  its 
business  to  the  bank  (earnings  on  its  deposits  less  expense  of 
caring  for  its  business),  the  legal  limits  to  the  bank's  loaning 
power,  etc.  It  sometimes  is  desirable  or  necessary  to  sell  com- 
mercial paper  (promissory  notes)  through  a  note  broker.  In 
former  times  these  notes  were  given  only  for  merchandise  bought, 
but  now  they  are  given  without  reference  to  the  purchase  of  any 
special  merchandise,  in  order  to  discount  bills.  "Of  late  years," 
says  the  Boston  Commercial  Bulletin,  "the  practice  has  arisen 
among  merchants  of  drawing  notes  payable  to  their  own  order 
and  selling  them  through  brokers  to  banks  or  other  lenders  in 
the  open  market.  The  practice  has  been  encouraged  in  two 
ways :  first,  because  sellers  of  nearly  all  kinds  of  staple  merchan- 
dise offer  large  discounts  for  cash,  and  the  buyer  who  sells  his 
note  for  money  and  then  pays  the  money  for  the  merchandise 
gets  the  benefit  of  these  discounts;  and  second,  because  a  large 
number  of  note  brokers  are  constantly  going  about  among  mer- 
chants and  urging  them  to  make  such  paper  for  sale.  When  a 
merchant  secures  his  funds  by  discounting  merchandise  notes  at 
one  or  more  banks  at  which  he  keeps  regular  accounts,  the  banks 
thus  have  an  accurate  method  of  determining  the  amount  of  pa- 
per in  the  market  bearing  his  signature  or  indorsement,  and 
whether  it  is  safe  to  accept  any  more  of  it.  But  the  commercial 
paper  which  is  sold  in  the  open  market  becomes  so  scattered  that 
nobody  but  the  maker  knows  how  much  of  it  is  in  existence  at 
any  one  time.  Cases  have  occurred  in  which  young  men  began 
business  with  small  capital,  and  being  encouraged  to  increase 
their  operations  by  making  single-name  notes  and  selling  them 
through  brokers,  have  thus  established  a  credit  utterly  dispro- 
portionate to  their  means  [usually  a  very  bad  thing  for  the  young 

267 


268  MODERN   BUSINESS    CORPORATIONS. 

man  as  well  as  for  the  note  buyers].  The  mere  fact  that  their 
notes  have  become  known  in  financial  circles  often  adds  to  their 
credit  and  enables  them  to  give  more  notes/'  Notes  should  never 
be  marketed  for  any  other  purpose  than  legitimate  business.  For 
future  security,  borrowings  should  be  limited  to  the  minimum 
value  of  the  company's  property  as  the  value  is  estimated  in  hard 
times.  It  is  not  good  financiering  to  sell  notes  at  a  heavy  dis- 
count, though  the  rate  of  interest  be  below  the  usual  percentage, 
and  this  will  have  to  be  done  if  the  business  statement  submitted 
to  prospective  purchasers  does  not  show  a  properly  limited  dis- 
posal of  evidences  of  indebtedness.  It  is  best,  where  possible,  to 
arrange  the  interest  so  that  the  notes  will  bring  their  face  value. 
Merchants  often  sell  their  paper  at  six  or  seven  per  cent,  and  dis- 
count their  own  bills  at  seven  to  nine  per  cent.,  making  two  or 
three  per  cent,  by  borrowing.  If  there  is  any  legitimate  reason 
for  secrecy  in  borrowing  it  can  best  be  maintained  by  selling 
notes  through  a  broker.  Albert  S.  Bolles  describes  the  methods 
of  the  note  broker  as  follows  (in  Practical  Banking,  published  by 
Levey  Bros.,  Indianapolis) :  "Sometimes  the  broker  has  the 
notes  in  his  possession  for  sale;  in  other  cases  he  has  simply  a 
memorandum  of  them.  In  the  latter  case  he  has  a  printed  form 
containing  the  name  of  the  maker,  amount,  when  and  where  pay- 
able, indorser  and  other  particulars.  A  list  is  sent  to  a  bank  con- 
taining such  a  description  of  the  notes,  or  the  broker  or  his  agent 
may  visit  the  banks  personally  and  exhibit  such  list  or  the  paper 
itself.  The  printed  list  of  notes  that  is  sometimes  sent  to  banks 
may  contain  a  description  of  a  hundred  pieces  of  paper,  and  is 
marked,  'This  is  for  bankers'  use  only/  Each  piece  is  numbered. 
If  a  bank  wishes  to  see  any  of  the  pieces  therein  described,  on 
application  they  are  sent  to  the  bank  by  the  broker.  If  a  note 
broker  is  selling  all  the  paper  given  by  a  certain  merchant,  the 
broker  will  be  careful  in  offering  it  for  sale.  If  the  banker  has 
$20,000  of  the  paper,  and  the  broker  knows  he  cannot  increase 
the  amount,  he  will  be  careful  not  to  offer  any  more.  He  will 
also  be  careful  not  to  put  such  paper  on  a  printed  list  through 
fear  the  banker  may  conclude  the  merchant  is  issuing  more  pa- 
per than  he  ought  to  issue,  if  the  merchant's  name  appears  fre- 


MARKETING  NOTES  IN  THE  OPEN  MARKET.       269 

quently  on  printed  lists.  Note  brokers,  or  their  agents,  often 
visit  banks  several  times  daily."  A  first-class  note  broker  will  not 
fear  to  offer  holdings  either  on  printed  lists  or  personally,  since 
he  has  assured  himself,  through  the  issuing  company's  sworn 
statements,  that  the  company  is  not  issuing  more  paper  than  it 
can  care  for.  Purchasers  of  commercial  paper  will  usually  do 
better  to  buy  through  a  reliable  broker  than  direct,  as  many 
losses  have  been  caused  by  companies  who  sent  their  paper  direct 
to  banks  with  the  privilege  of  purchase  or  return.  The  Altman 
&  Co.  (Akron,  Ohio)  paper  is  an  example  in  point. 

"Brokers  do  not  always  get  possession  of  notes  until  they  have 
paid  for  them.  Several  practices  exist  in  this  regard.  One  prac- 
tice is  for  the  merchant  to  make  notes  and  then  deliver  them  to  a 
note  broker  for  sale.  The  latter  may  give  a  receipt  or  acknowledg- 
ment, or  not.  In  such  a  case  the  merchant  has  entire  confidence 
in  the  broker,  otherwise  he  would  not  give  him  notes  without  ade- 
quate security.  *  *  *  Another  way  is  for  merchants  to  leave 
their  paper  with  a  note  broker  and  get  immediately  from  him  a 
certain  amount  thereon.  A  merchant,  for  example,  may  leave 
$25,000  of  paper  and  ask  for  $10,000,  expecting  the  balance  when 
the  paper  is  sold.  The  note  broker  pays  him  this  advance  on  ac- 
count and,  after  selling  the  paper  and  deducting  his  commission, 
sends  the  balance.  Another  way  is  for  the  note  broker  to  buy  the 
paper,  paying  therefor  at  the  time  of  the  purchase.  A  note  broker 
will  go  to  a  merchant  and  will  say  he  will  take  so  much  of  the 
merchant's  paper  at  such  a  rate  of  interest.  If  the  rate  be  accept- 
able, the  merchant  will  sell  paper  and  get  the  money.  In  these 
cases  the  broker  expects  to  sell  the  paper  so  as  to  net  the  pur- 
chaser a  lower  rate  of  interest  and  thus  make  more  than  he  would 
if  charging  the  ordinary  commission.  Many  brokers  do  wholly 
a  business  of  this  kind — buying  paper  and  selling  it  at  the  best 
rate  they  can  obtain  for  it.  In  negotiating  paper  note  brokers 
sometimes  indorse  it,  but  bankers  and  others  buy  it  because  the 
maker  is  supposed  to  be  good,  and  not  because  the  broker  in- 
dorses it." 

The  note  broker's  profit  on  paper  sold  through  him  is  usually 
one-eighth  or  one-fourth  of  one  per  cent. 


THE  CORPORATE  SEAL  AND  CORPORATE 
SIGNATURES. 


It  is  almost  universally  true  that  a  corporation  has  a  seal,  and 
that  affixing  the  seal  is  an  important  part  of  the  execution  of  any 
formal  instrument  by  the  corporation.  The  distinction  between 
sealed  and  unsealed  instruments  having  been  abolished,  in  whole 
or  in  part,  in  many  jurisdictions,  and  the  law  permitting  officers 
and  agents  of  a  corporation  to  bind  it  by  parol  contracts  and 
unsealed  writings  for  many  purposes,  the  seal  is  not  so  highly 
esteemed  as  formerly.  But  it  is  still  used  on  formal  instruments, 
such  as  deeds  and  mortgages,  bonds,  stock  certificates,  etc.  And 
when  the  secretary  gives  a  formal  official  certificate,  as  in  certi- 
fying to  a  transcript  of  the  by-laws  or  minutes,  the  seal  should 
be  affixed  with  his  signature.  The  seal  is  usually  so  mounted 
as  to  impress  upon  paper  in  raised  characters  the  words  and  de- 
vice adopted  by  the  corporation,  and  prescribed  in  its  by-laws. 
It  is  not  necessary  to  use  wax  or  wafers  in  affixing  the  seal, 
though  they  are  often  used.  The  secretary  is  custodian  of  the 
seal  by  virtue  of  his  office,  subject  to  regulations  and  restric- 
tions contained  in  the  by-laws.  He  is  held  responsible  for  any 
misuse  of  the  seal  by  permitting  it  to  be  affixed  to  instruments 
the  execution  of  which  has  not  been  authorized  by  the  corpora- 
tion. 

Letters  and  informal  documents  relating  to  the  corporation 
business  are  usually  signed  with  the  name  of  an  officer  of  the  cor- 
poration followed  by  his  official  title,  thus,  "John  Johnson, 
President,"  or  "George  Williams,  Secretary  Fidelity  Trust  Co." 
But  when  formal  contracts  are  executed  the  name  of  the  corpo- 
ration itself  should  be  subscribed  and  its  seal  affixed,  followed 
by  the  signatures  of  the  officers  who  acted  for  the  corporation 

270 


CORPORATE   SEAL  AND  SIGNATURES.  271 

in  executing  the  contract.  The  ordinary  form  of  signature  used 
in  such  cases  is  as  follows : 

(Corporation  Seai.)    THE  FIDELITY  SECURITY  COMPANY, 

By  JOHN  JOHNSON,  President 
Attest,  GEORGE  WILLIAMS,  Secretary. 

The  corporation  will  be  bound  by  the  signatures  of  its  officers, 
when  they  sign  on  its  behalf  within  the  scope  of  their  authority, 
whether  the  name  of  the  corporation  is  made  a  part  of  the  signa- 
ture or  not.  But  for  the  protection  of  the  officers  themselves  a 
form  of  signature  using  the  name  of  the  company  and  stating 
that  it  is  affixed  by  the  subscribing  officers  should  be  adopted 
whenever  the  contract  includes  a  promise  to  pay  money  or  to  da 
any  other  act  which  the  officers  are  capable  of  performing  as 
individuals.  For  it  is  held  that  where  an  officer  signs  his  own 
name  to  a  note  or  contract  which  purports  to  be  made  by  the  per- 
son signing  it,  followed  by  the  word  "president,"  or  other  words 
indicating  his  official  position  in  a  corporation,  he  binds  himself 
as  an  individual,  and  cannot  escape  liability  on  the  ground  that 
the  contract  was  entered  into  by  and  on  behalf  of  his  corporation. 


THE  CORPORATION  LAWYER. 

The  evolution  in  the  methods  of  modern  business  organiza- 
tion has  brought  about  a  new  and  extensive  department  of 
specialized  law  practice.  The  corporation  lawyer  attends  to  the 
legal  side  of  organizing  a  corporation,  advising  as  to  capitaliza- 
tion, the  state  in  which  to  incorporate,  and  all  the  matters  of 
primary  consideration  that  have  so  much  to  do  with  the  success 
of  the  corporation  later.  He  is  also  the  corporation  counsel  when 
the  corporation  is  organized  and  operating.  He  is  an  important 
adjunct  to  the  large  commercial  and  financial  houses  of  the 
country,  and  is  frequently  a  partner  or  stockholder,  and  is 
usually  active  in  directing  the  larger  transactions  of  companies 
in  which  he  is  interested.  To  the  large  and  intricate  business 
organizations  he  is  almost  a  sine  qua  non.  Take,  as  an  instance 
of  a  modern  business  organization,  the  United  States  Steel  Cor- 
poration, with  its  eleven  hundred  millions  of  capital.  "The  net 
earnings  of  the  United  States  Steel  Corporation  for  1902  were 
over  $133,000,000 — more  than  the  total  sum  raised  by  taxation 
in  New  York  and  Ohio  together,  in  1898,  and  twice  the  amount 
raised  in  Pennsylvania  the  same  year.  The  gross  income  of  the 
same  corporation  for  1902,  $565,000,000,  was  more  than  the 
total  ordinary  receipts  of  the  national  government  for  any  year 
prior  to  1899.  Its  stock  and  bonds  are  more  than  the  total  capi- 
tal engaged  in  manufacture  in  any  state  of  the  Union,  except 
New  York  and  Pennsylvania."  (Need  of  a  National  Incorpora- 
tion Law,  Horace  L.  Wilgus.)  Mr.  John  Brisben  Walker  points 
out  that  this  company  represents  what  not  many  years  ago  was 
several  thousand  separate  businesses.  The  supplying  of  steel, 
coal,  coke,  oil,  lime-stone,  transportation,  and  so  on,  was  divided 
among  an  endless  number  of  small  firms.  There  was  lack  of  sys- 
tem in  making  contracts,  there  were  failures  to  deliver,  there 

272 


THE   CORPOBATION   LAWYER.  273 

were  misunderstandings,  and  unwise  and  incomplete  methods  of 
doing  business,  both  from  commercial  and  legal  standpoints. 
There  were  many  disputes,  and  differences  of  opinion  were  set- 
tled by  the  savage  arguments  of  lawyers,  who  submitted  their  f 
cases  to  the  arbitrament  of  the  courts.  The  bitter  hatreds  and 
the  long  and  expensive  legal  fights  marred  the  welfare  and 
happiness  of  every  commercial  community.  The  several  thou- 
sand businesses  brought  under  the  management  of  such  a  com- 
pany as  the  United  States  Steel  has  brought  about  harmonious 
transactions,  because  one  board  of  directors  superintends  the 
business  of  the  company,  and  in  place  of  several  thousand  law- 
yers connected  fortuitously  with  a  number  of  small  business  in- 
terests, each  lawyer  finding  profitable  employment  where  there 
was  a  dispute  and  a  quarrel,  there  are  now  a  few  able  counselors 
employed  for  the  purpose  of  preventing  legal  complications  and 
insuring  harmony  instead  of  discord.  Such  lawyers  are  fre- 
quently retained  on  a  salary,  being  paid  so  much  per  year  sim- 
ply to  attend  to  the  business  that  is  referred  to  them.  Not  only 
do  the  trusts  employ  corporation  lawyers  in  this  way,  but  large 
business  interests  in  nearly  every  metropolis  have  corporation 
counsel  to  whom  they  refer  legal  matters  for  advise  or  adjust- 
ment. No  class  of  lawyers  is  more  highly  regarded,  or  finds ' 
more  profitable  and  constructive  employment  than  those  who 
assist  in  the  organization  of  corporations  and  have  part  in  their 
conduct  after  organization.  The  best  corporation  lawyers  are 
familiar  with  the  technicalities  and  practices  of  finance,  broker- 
age, banking  and  industrial  commerce,  as  well  as  with  the  laws 
bearing  on  the  transactions  of  these  occupations  and  of  corpora- 
tions in  general.  They  familiarize  themselves  with  the  details 
of  their  clients'  business  and  keep  in  touch  with  the  officers  of 
the  companies  they  represent  and  with  all  the  important  affairs 
of  the  companies.  They  familiarize  themselves  with  questions  of 
science  which  enter  into  the  evolution  of  business,  and,  in  gen- 
eral, instead  of  being  a  clog  upon  the  industry  of  others,  they 
themselves  are  leaders  in  the  direction  of  higher  economic  de- 
velopment. Being  less  technical  in  training  than  the  officers  and 
MOD.  Bus.  CORP.— 18 


274  MODERN   BUSINESS   CORPORATIONS. 

directors  of  the  companies,  and  being  further  removed  from  the 
personal  elements  that  may  enter  into  differences  of  opinion 
among  officers  and  managers,  the  lawyers  are  better  able  to  take 
a  bird's-eye  view  of  the  affairs  of  the  companies  and  are  the  more 
capable  of  advising  efficiently.  The  function  of  the  corporation 
lawyer  is  characteristically  a  constructive  one ;  it  is  a  part  of  the 
upbuilding  of  great  commercial  enterprises.  It  is  the  branch 
to  which  such  men  as  Charles  E.  Butler,  William  M.  Evarts, 
and  such  other  leading  legal  lights  as  Choate,  Eeed,  Eoot,  Tra- 
cey,  Knox,  Cromwell,  Dill,  Parsons  and  John  K.  Dos  Passes 
have  given  much  of  their  best  attention.  In  selecting  a  corpora- 
tion counsel  a  large  concern  will  do  well  to  choose  a  lawyer  who 
makes  a  specialty  of  corporation  practice. 


CORPORATION  BOND  AND  STOCK  INVESTMENTS. 

The  investor,  either  in  bonds  or  stocks,  will  find  much  in  the 
foregoing  pages  to  enlighten  him  in  buying  judiciously.  In  the 
part  on  accounting,  Mr.  Greene's  analysis  of  a  statement  will  be 
of  assistance  in  estimating  the  value  of  a  stock  by  applying  a 
similar  method  to  the  statement  of  the  concern  whose  stock  the 
investor  is  investigating.  Frequently  concerns  that  are  hard  up 
will  try  to  save  themselves  by  issuing  additional  stock — common 
or  preferred — and  the  statement  of  a  "going  concern"  which  is 
thus  issuing  stock  should  be  carefully  examined.  The  wording 
of  a  preferred  stock  or  bond  contract  should  be  carefully  read, 
as  the  name  of  a  bond  or  stock  is  sometimes  misleading.  A 
satisfactory  statement  and  a  contract  that  secures  the  purchaser 
without  question  as  to  his  rights  are  necessary  to  safety  of 
principal  and  interest  or  dividends.  One  cannot  buy  a  stock  or 
bond  having  a  contract  on  it  and  claim  that  he  was  misled  as- 
to  the  character  of  it.  Whether  he  reads  or  does  not  read  the 
contract  he  is  estopped  from  complaining.  It  is  usually  well 
to  read  the  articles  of  association  and  sometimes  the  by-laws  of 
the  corporation.  In  buying  the  securities  of  a  public  utility  or 
franchise  corporation  the  franchise  should  be  examined  with 
reference  to  its  length  in  years,  its  scope,  the  terms  or  condi- 
tions of  its  renewal,  and  its  limitations,  if  it  has  any.  The  Art 
of  Investing  says:  "We  must  also  bear  in  mind  and  carefully 
weigh  the  character  of  the  community  which  grants  the  fran- 
chise, and  not  overlook  the  possible  effect  of  a  change  in  public 
sentiment.  While  a  city  or  other  municipality  cannot,  as  a 
rule,  cancel  a  franchise  which  has  been  legally  granted,  and 
with  the  terms  of  which  the  company  has  complied,  yet  there  are 
methods  whereby  the  community  can,  if  it  so  elect,  take  to  itself, 
through  taxation,  what  is  generally  termed  the  'unearned  incre- 

275 


276  MODERN   BUSINESS    CORPORATIONS. 

mem?  in  the  franchise.  For  instance,  a  city  may,  by  legislation, 
limit  the  rate  of  fare  which  the  company  may  be  allowed  to 
charge;  it  may  insist  upon  a  transfer  system  which  will  tend  to 
reduce  the  income  of  a  road;  it  may  adopt  a  franchise  law  re- 
quiring the  company  to  pay  into  the  city's  treasury  a  certain 
proportion  of  its  earnings  in  addition  to  the  amount  paid  for 
ordinary  taxes.  This  feature  of  the  franchise  question  is  coming 
to  the  front  very  rapidly  nowadays,  and  it  is  quite  necessary  for 
the  intelligent  investor  to  be  thoroughly  informed  along  this 
line."  The  analysis  of  railroad  reports,  for  investors  in  railway 
securities,  is  well  treated  in  Greene's  Corporation  Finance  and 
in  Woodlock's  Anatomy  of  a  Railroad  Report  and  Ton-Mile  Cost. 
Railway  accounts  and  statistics  are  discussed  also  in  John- 
son's American  Railway  Transportation.  The  Art  of  Wall 
Street  Investing  (Moody)  is  helpful  generally.  Ideas  as  to  the 
proper  capitalization  of  corporations  may  be  had  in  the  discus- 
sions on  that  subject  in  this  book,  and  there  is  useful  information 
under  the  heading  "Bonds."  The  income  tables  in  the  appendix 
will  also  be  useful  to  the  investor. 

In  The  Art  of  Investing,  Mr.  Moody  shows  the  necessity  for 
personal  knowledge  on  the  part  of  the  investor.  He  says :  "Two 
common  and  fatal  mistakes  should  be  avoided.  One  is  relying 
solely  upon  the  advice  of  another.  No  one  competent  to  form 
an  opinion  for  himself  should  put  his  pecuniary  interests  un- 
reservedly in  the  keeping  of  another.  Such  absolute  confidence 
invites  betrayal.  By  far  the  greater  number  of  losses  to  investors 
have  been  in  securities  purchased  exclusively  on  the  recommen- 
dation of  outside  parties.  While  it  is  well  to  get  the  opinion  of 
a  reputable  broker,  the  purchaser  should  investigate  for  himself. 
[It  is  sometimes  wise  to  get  the  opinions  of  several  brokers  and 
weigh  their  opinions  against  one  another.]  The  other  mistake 
is  to  uniformly  give  preference  to  listed  securities.  *  *  * 
Many  persons  seem  to  think  that  stocks  and  bonds  must  have  a 
value  if  they  are  quoted  at  some  stock  exchange,  forgetting  how 
many  fancies  have  been  ballooned  until  they  have  burst  at  such 
places.  On  the  contrary,  such  a  position  is  likely  to  expose  them 
to  manipulation  for  purely  speculative  purposes.  Stock  exchange 


CORPORATION    BOND    AND    STOCK    INVESTMENTS.  277 

quotations  are  often  unsafe  guides  to  buyers.  They  represent  not 
merely  the  value  of  the  property  but  the  pitch  of  speculation  at 
the  time.  *  *  *  They  are  pretty  sure  to  be  too  high  or  too 
low.  *  *  *  Securities,  in  the  long  run,  must  stand  upon 
their  merits,  and  purchasers  have  merely  to  follow  business 
principles  as  taught  by  the  canons  of  common  sense." 

Other  valuable  advice  given  by  Mr.  Moody  is  this:  "Always 
question  any  proposition  offering  stocks  or  bonds  for  sale  where 
such  offers  are  made  directly  by  the  company  itself,  and  not 
through  a  banking  house  or  other  reputable  concern.  If  no 
bankers  or  brokers  are  handling  the  sale  of  securities,  it  is 
usually  the  case  that  there  is  something  'shady'  about  the 
scheme.  There  are  exceptions,  of  course,  but  not  many.  If  the 
securities  are  offered  by '  bankers  and  brokers,  the  next  step 
should  be  to  ascertain  the  standing,  reputation  and  financial 
strength  of  the  bankers  or  brokers  themselves.  Wall  street  and 
other  financial  centers  have  their  full  share  of  irresponsible 
concerns  of  this  class.'' 


THE  MAGNITUDE  OF  CORPORATIONS. 

The  "trusts"  are,  of  course,  the  largest  corporations.  The 
largest  of  the  trusts  is  the  United  States  Steel  Corporation,  in- 
corporated in  New  Jersey,  February  25,  1901,  by  Charles  C. 
Cluff,  William  J.  Curtis  and  Charles  MacVeagh,  all  of  New 
Jersey,  each  subscribing  for  five  shares  of  preferred  stock  and 
five  shares  of  common  stock,  $100,  par  value,  of  the  thirty 
•shares,  or  $3,000,  "the  amount  with  which  the  company  will 
commence  business."  But  as  fixed  April  1,  1901,  "the  total  au- 
thorized capital  stock  of  the  corporation  is  eleven  hundred  mil- 
lion dollars  ($1,100,000,000),  divided  into  eleven  million  shares 
of  the  par  value  of  $100  each.  Of  such  total  authorized  capital 
stock,  5,500,000  shares,  amounting  to  $550,000,000,  shall  be 
preferred  stock,  and  5,500,000  shares,  amounting  to  $550,- 
000,000,  shall  be  common  stock."  "The  duration  of  the  cor- 
poration shall  be  perpetual."  The  large  capitalization  is  al- 
most inconceivable.  According  to  Professor  Wilgus,  of  the 
University  of  Michigan  (see  Wilgus'  The  U.  S.  Steel  Cor- 
poration, 1901),  from  whom  this  description  is  taken,  the 
capitalization  represents  one-sixty-seventh  of  the  total  wealth 
of  the  United  States  in  1900,  one-tenth  of  the  value  of  the 
manufactures  of  the  United  States,  one-fifteenth-  of  the  value  of 
all  the  gold  and  silver  mined  in  the  world  since  the  discovery 
of  America,  five-eighths  of  the  value  of  all  the  farm  animals  in 
the  United  States  in  1900,  almost  equal  to  the  value  of  all  the 
corn,  wheat,  rye,  oats,  barley,  buckwheat,  potatoes — the  food 
crops  in  1900 — more  than  three  times  the  value  of  the  cotton 
and  wool — the  clothing  crops — of  the  United  States  in  1900. 
If  all  the  stocks  and  bonds  had  been  issued  in  shares  of  $90 
each  there  would  have  been  one  for  each  family  in  the  United 
States,  or  it  would  pay  all  the  expenses  of  the  public  schools 

278 


THE  MAGNITUDE   OF   CORPORATIONS.  279 

of  the  United  States  for  the  next  seven  years,  or  there  would  be 
about  $18  for  each  man,  woman  and  child  in  the  United  States, 
or  about  90  cents  for  each  man,  woman  and  child  on  the  face  of 
the  earth.  The  corporation  exercises  direct  and  positive  control 
over  213  different  manufacturing  and  transportation  plants  and 
companies,  and  forty-one  different  mines,  located  in  eighteen 
different  states.  It  also  controls  directly  over  1,000  miles  of 
railroad  to  ore,  coke  and  manufacturing  properties,  and  a  lake 
fleet  of  112  vessels,  the  finest  on  the  lakes.  By  "community  of 
interest"  the  corporation  is  allied  with  hundreds  of  millions 
more  of  capital.  The  moving  persons  in  the  consummation  of 
the  organization  of  the  United  States  Steel  Corporation  were 
J.  Pierpont  Morgan,  the  financier-organizer,  and  Andrew  Car- 
negie, the  manufacturer-organizer.  J.  D.  Eockefeller,  also,  prob- 
ably, had  something  to  do  with  the  organization.  J.  P.  Morgan 
&  Co.  were  the  managers  of  the  syndicate,  formed  by  subscribers 
to  the  amount  of  $200,000,000,  the  subscribers  comprising  lead- 
ing financial  interests  in  America  and  Europe.  It  has  been  esti- 
mated that  the  syndicate  made  about  $52,000,000  by  the  deal. 
If  no  allowance  is  made  for  good  will,  from  one-half  to  four- 
sevenths  of  the  stock  is  water ;  but  if  the  capitalization  is  prop- 
erly based  on  the  earning  capacity  of  a  "going  concern,"  and  not 
on  the  cost  of  reproducing  the  plants,  it  is  not  excessive,  being 
a  capitalization  of  the  earnings  at  about  seven  and  one-half 
per  cent. 

There  are  seven  of  the  greater  industrial  trusts  the  par 
value  of  whose  outstanding  stocks  and  bonds  (The  Truth 
About  the  Trusts,  Moody,  1904)  reaches  a  total  of  $2,662,752,- 
100.  Of  this  amount  over  one-half,  or  $1,370,000,000,  is  in- 
cluded in  the  capitalization  of  the  United  States  Steel  Corpora- 
tion and  its  subsidiary  companies.  These  trusts,  except  the 
sugar  trust,  have  been  organized  since  1898,  and  all  are  incor- 
porated under  New  Jersey  laws.  They  represent  an  aggregate 
consolidation  of  over  1,500  distinct  plants.  While  the  par  value 
capitalization  of  these  trusts  is  $2,662,752,100,  their  market 
value  is  only  about  $2,278,460,000. 

There  are  298  lesser  industrial  trusts,  representing  a  consoli- 


280  MODERN   BUSINESS   CORPORATIONS. 

dation  of  over  3,400  original  plants,  with  a  total  par  value  capi- 
talization of  $4,055,039,433.  Then  there  are  thirteen  active  trusts 
undergoing  reorganization  or  readjustment  which  represent  334 
plants  and  a  total  par  value  capitalization  of  $528,551,000. 
There  are  altogether  318  important  trusts  in  this  country,  236 
incorporated  since  1898,  and  170  incorporated  under  New  Jer- 
sey laws.  The  aggregate  capitalization  outstanding  in  the  hands 
of  the  public  is  no  less  than  $7,246,342,533,  representing  con- 
solidations of  nearly  5,300  distinct  plants,  and  covering  almost 
every  line  of  productive  industry.  The  capitalization  of  and 
number  of  plants  controlled  by  some  of  the  larger  trusts  is  as  fol- 
lows: 

Plants.  Capitalization. 

Amalgamated  Copper  Company 11        $170,000,000 

Consolidated  Tobacco  Co (about)     150          502,915,700 

Standard  Oil  Co (about)     400  97,500,000 

American  Smelting  and  Refining  Co 121  201,550,400 

American  Sugar  Refining  Co 55  145,000,000 

International  Merchant  Marine  Co 6          170,786,000 

Of  the  greater  franchise  trusts,  embracing  public  service 
consolidations,  including  telephone,  telegraph,  gas,  electric  light 
and  electric  railway  companies,  representing  about  1,336  of  the 
larger  original  corporations,  the  total  capitalization  is  $3,735,- 
456,071.  Of  this  kind  of  trust  the  capitalization  of  eleven  ex- 
ceed $100,000,000,  twenty-three  exceed  $50,000,000,  and  ninety- 
four  exceed  $5,000,000.  These  stand  well  with  the  industrial 
trusts  mentioned  before,  ten  of  which  have  a  capitalization  of 
$100,000,000  or  over,  thirty  of  $50,000,000,  or  over,  and  129 
of  $10,000,000,  or  over.  Then  there  are  six  great  railroad  groups, 
all  exceeding  $1,000,000,000  in  capitalization,  while  the  Morgan 
group  exceeds  $2,000,000,000.  About  445  active  industrial, 
franchise  and  transportation  corporations  are  represented  in  Mr. 
Moody's  book,  representing  8,664  original  companies  and  a  total 
capitalization  of  $20,379,162,551. 

Besides  these  large  corporations,  there  are  very  many  more 
smaller  ones,  usually  being  single,  unconsolidated  businesses, 
representing  billions  of  capitalization  and  of  capital. 


DISTRIBUTION  OF  CORPORATE  WEALTH. 

It  has  been  estimated  by  Judge  Grosscup  that  one-third  of 
the  wealth  of  the  United  States  is  represented  by  corporations. 
It  is  certain  that  the  par  value  of  all  the  stock  and  bonds  admit- 
ted to  trading  in  the  New  York  Stock  Exchange  equals  one- 
fifth  of  the  nation's  wealth. 

It  would  be  important  to  know  just  how  the  immense  wealth 
concentrated  in  stock  companies  is  distributed,  just  how  many 
persons  share  in  the  ownership.  There  are,  however,  no  compre- 
hensive statistics  bearing  on  this  point.  We  have  but  two  guides 
to  an  estimate.  The  comptroller  of  the  currency  reports  that 
on  June  30,  1904,  there  were  318,735  holders  of  the  $770,594,- 
535  capital  stock  of  the  national  banks  of  the  United  States. 
The  Interstate  Commerce  Commission  reports  that  on  or  about 
the  same  date  there  were  327,851  holders  of  the  capital  stock 
of  the  railroads,  which  in  1903  amounted  to  $6,355,207,335.  No 
record  was  given  of  the  bondholders.  The  following  table  shows 
these  figures  to  better  advantage: 

Railroads.  Banks. 

Capital   $6,355,207,335     $770,594,535 

Number  of  stockholders 327,851  318,735 

Average  per  stockholder $19,380  $2,417 

If  it  is  a  fact  that  one-third  of  the  wealth  of  the  country  is  held 
by  stock  companies,  then  the  total  stocks  and  bonds  outstanding 
amount  to  about  $35,000,000,000.  Of  this  great  sum,  one-fifth, 
or  $7,000,000,000,  is  shown  in  the  above  table.  One-fifth  of  the 
corporate  wealth  is  thus  held  by  646,586  stockholders.  The  same 
proportion  extended  to  the  other  four-fifths  would  make  3,232,- 
000  stock  and  bondholders  in  the  United  States.  It  is,  however, 
probable  that  there  are  not  so  many.  There  were  67,522  stock- 

281 


282  MODERN   BUSINESS   CORPORATIONS. 

holders  of  the  United  States  Steel  Corporation  at  the  time  of  the 
last  report,  but  as  a  rule  the  stock  of  industrial  companies  does 
not  enjoy  so  wide  a  distribution  as  the  stock  of  railroad  com- 
panies, just  as  the  stock  of  railroad  companies  is  more  concen- 
trated than  that  of  banks. 

But  even  assuming  that  there  are  3,232,000  stock  and  bond 
holders  in  the  United  States,  it  does  not  follow  that  there  are 
that  number  of  individuals  owning  stocks  and  bonds.  For  there 
are  many  individuals  owning  securities  in  different  railroads, 
banks  and  industrial  companies,  and  there  must  therefore  be 
many  duplications  in  the  foregoing  estimate.  We  are  now  utterly 
in  the  dark,  but  if,  as  a  mere  guess,  we  reduce  the  3,232,000 
stock  and  bondholders  to  2,500,000  individuals,  the  showing  re- 
sults in  2,500,000  persons  owning  $3  5;000,0  00,000  of  the  na- 
tion's wealth,  while  the  remaining  80,000,000  own  $70,000,- 
000,000. 

Eight  here,  however,  another  qualification  must  be  made. 
Large  blocks  of  the  securities  are  held  by  savings  banks,  insur- 
ance companies  and  trust  companies  which  represent  millions  of 
small  investors.  For  instance,  thirty-one  insurance  companies, 
representing  15,522,671  insurance  policies,  held  on  December 
31,  1904,  $1,216,865,128  of  stocks  and  bonds.  The  savings  banks 
of  the  state  of  New  York,  representing  2,443,555  open  accounts, 
hold  $598,125,009  par  value  of  stocks  and  bonds. 

There  can  be  no  doubt  that  notwithstanding  the  concentration 
resulting  from  the  company's  form  of  doing  business,  there  is 
still  a  wide  distribution  of  wealth  in  this  country.  This  fact, 
however,  does  not  alter  the  other  fact  that  corporate  wealth, 
while  widely  distributed,  is  narrowly  controlled;  that  is  to  say, 
a  constantly  decreasing  number  of  capitalists,  through  control 
of  boards  of  directors,  are  in  control  of  the  immense  wealth 
owned,  directly  or  indirectly,  by  millions  of  individuals. — Edi- 
torial, Wall  Street  Journal,  1905. 


ORIGIN    OF    THE    COMMERCIAL    MANIFESTATIONS 
OF    CORPORATE    EXISTENCE: 

STOCK  EXCHANGES,  STOCK  BROKERS,  AND  EVIDENCES  OF  TITLE 
TO  CORPORATE  SHARES  AND  DEBT  SECURED  BY  MORTGAGE. 

It  is  not  probable  that  stock  certificates  were  known  in  ancient 
times;  they  have  not  been  traced  back  of  the  middle  of  the 
seventeenth  century.  Shares  of  the  East  India  Company  and 
the  Hudson  Bay  Company  were  traded  in  at  the  latter  part  of 
that  century.  Mr.  Dos  Passes  says:  "The  Roman  law  required 
three  persons  to  organize  a  corporation,  and  as  each  body  had  at 
least  that  number  of  members,  if  not  more,  it  would  seem  but  nat- 
ural that  a  certificate,  or  some  other  substantial  muniment  of  title, 
should  have  been  issued  by  the  corporation  to  its  respective  mem- 
bers, in  which  the  proportion  of  interest  of  each  in  the  capital  or 
corporate  property  of  the  association  appeared.  But  whether  a 
certificate  was,  in  fact,  issued,  and  if  so,  was  regarded  as  prop- 
erty capable  of  sale  or  negotiation,  and  of  vesting  in  the  per- 
sonal representatives  of  the  owner,  on  his  decease,  or  whether 
the  corporations  were  all  in  the  nature  of  guilds,  conferring 
upon  the  members  mere  personal  rights — all  of  these  questions 
seem  now  to  be  incapable  of  solution;  and  the  Roman  law, 
which  sheds  such  floods  of  light  upon  commercial  subjects,  ap- 
parently leaves  the  above  matters  in  total  darkness."  The  evolu- 
tion of  the  modern  railway  and  industrial  bond  from  the  old 
bottomry  bond  of  the  middle  ages,  through  the  turnpike  and 
canal  trust,  was  so  slow  and  gradual  that  it  is  hard  to  tell  where 
one  phase  ends  and  another  begins.  Practically  all  the  large 
transportation  enterprises  have  been  at  least  partly  built  from 
the  proceeds  of  loans,  so  that  the  dates  of  the  issue  of  loan 
certificates  are  in  general  coincident  with  the  dates  of  turnpike, 

283 


284  MODERN   BUSINESS    CORPORATIONS. 

canal  and  railroad  building.  John  R.  Dos  Passos  says  in  his 
book,  Commercial  Trusts :  "I  believe  that  the  first  railroad  bonds, 
secured  by  mortgage,  emanated  from  Philadelphia,"  but  he 
gives  no  date.  It  is  probable  that  these  first  modern  mortgage 
bonds  were  issued  between  1845  and  1850,  as  the  railroads  of 
this  country  began  to  be  developed  about  this  time.  On  July  10, 
1845,  the  Madison  and  Indianapolis  Railroad  Company,  extend- 
ing from  Madison  to  Indianapolis,  Ind.,  executed  a  mortgage 
securing  $50,000  of  bonds,  and  on  July  11,  1846,  executed  an- 
other mortgage  securing  $100,000  of  bonds.  On  May  1,  1845, 
the  Little  Miami  Railroad  Company,  extending  from  Spring- 
field to  Cincinnati,  Ohio,  executed  a  mortgage  securing  $200,- 
000  of  bonds.  But  none  of  the  bonds  of  these  roads  appears  to 
have  been  issued.  Of  the  more  than  three  hundred  different  is- 
sues of  bonds  by  the  many  companies  which  have  been  generally 
absorbed  into  the  Pennsylvania  Lines  west  of  Pittsburg,  the  fol- 
lowing appear  to  be  the  oldest : 

March  9,  1849 — Columbus  &  Xenia  R.  R.  Co.  (Columbus  to 
Xenia,  O.) $300,000 

January  1,  1850 — Terre  Haute  &  Richmond  R.  R.  Co.  (In- 
dianapolis to  Illinois  State  Line) 74,500 

February  1,  1850— Cleveland  &  Pittsburgh  R.  R.  Co.  (Cleve- 
land to  Wellsville,  O.) 800,000 

May  1,  1850— Rushville  &  Shelby ville  R.  R.  Co.  (Rushville  to 
Shelbyville,  Ind.) 40,000 

July  1,  1850 — Ohio  &  Pennsylvania  R.  R.  Co.  (Pittsburgh  to 
Massillon,  O.)  1,000,000 

September  21,  1851 — Ohio  &  Pennsylvania  R.  R.  Co.  (Mas- 
sillon to  Crestline,  O.) 750,000 

January  1,  1851 — Eaton  &  Hamilton  R.  R.  Co.  (Hamilton  to 
Indiana  State  Line 25,000 

February  10,  1851— Dayton  &  Western  R.  R.  Co.  (Dayton  to 
Indiana  State  Line) 300,000 

March  1,  1851 — Jeffersonville  R.  R.  Co.  (Jeffersonville,  Ind., 
to  Columbus,  Ind.) 289,000 

April  1,  1851 — Madison  &  Indianapolis  R.  R.  Co.  (Indianap- 
olis to  Madison,  Ind.) 600,000 

November  1,  1851 — Columbus,  Piqua  &  Indiana  R.  R.  Co. 

(Columbus,  O.,  to  Union  City,  Ind.) 600,000 


COMMERCIAL  MANIFESTATIONS  OF  CORPORATE  EXISTENCE     285 

February  25, 1852— New  Castle  &  Richmond  R.  R.  Co.  (Rich- 
mond to  New  Castle,  Ind.) 300,000 

April  1,  1852 — Akron  Branch  Cleveland  &  Pittsburgh  R.  R. 

Co.  (Hudson  to  Millersburg,  O.) 500,000 

April  10,  1852 — Indiana  Central  Ry.  Co.  (Indianapolis  to 
Richmond,  Ind.) 600,000 

April  15,  1852 — Cincinnati,  Wilmington  &  Zanesville  R.  R. 
Co.  (Zanesville  to  Morrow,  O.) 1,300,000 

September  7,  1852 — Steubenville  &  Indiana  R.  R.  Co.  (Steu- 
benville  to  Newark,  O.) 1,500,000 

November  1,  1852 — Richmond  &  Miami  R.  R.  Co.  (Rich- 
mond to  Indiana  State  Line) 60,000 

March  2,  1853 — Little  Miami  R.  R.  Co.  (Cincinnati  to 
Springfield,  O.) 1,500,000 


The  first  issue  of  bonds,  in  the  form  now  generally  used,  on 
the  Baltimore  and  Ohio  road  was  made  April  29,  1853,  the 
total  issue  being  $700,000,  and  the  bonds  in  denominations 
of  $500  and  $1,000  each.  A  letter  from  the  secretary  of  the 
New  York  Central  says:  "It  would  be  difficult  to  give  the 
date  when  the  first  New  York  Central  bonds  were  issued.  In 
1853  some  seven  or  eight  small  companies  owning  roads  between 
Albany  and  Buffalo  consolidated,  forming  the  old  New  York 
Central  Company.  In  looking  over  the  records  of  some  of  the 
old  companies  I  find  they  had  bonded  indebtedness,  but  the 
records  do  not  show  whether  the  bonds  were  secured  by  mort- 
gage. I  have  hanging  in  my  office  a  debt  certificate  of  one  of 
the  companies  referred  to,  the  Mohawk  and  Hudson  Railroad 
Company,  entitled  'Loan  of  May  11,  1837/  and  after  acknowledg- 
ing its  indebtedness,  it  says:  'Being  for  money  borrowed  by 
said  company  in  pursuance  of  act  of  legislature  of  the  state  of 
New  York  of  llth  May,  1837,  and  by  authority  given  at  a  meet- 
ing of  the  board  of  directors  on  the  17th  of  June,  1837,  etc., 
etc./  and  closes  with  this  sentence,  'And  the  holder  of  this 
certificate  shall  be  entitled  at  any  time  within  two  years  from 
the  date  hereof  to  convert  the  said  principal  sum  into  capital 
stock  of  said  company  at  par  on  surrendering  this  certificate, 
with  the  dividend  warrants,  on  the  margin  hereof/  "  In  England, 
instead  of  the  distinction  between  stock  and  bonds,  the  English 


286  MODERN   BUSINESS   CORPORATIONS. 

railroad  capital  is  divided  into  ordinary,  preference,  guaran- 
teed, and  debenture  stocks,  the  last  comprising  only  about 
25  per  cent,  of  the  whole,  and  corresponding  most  nearly  to  our 
bonds  in  character.  In  America  by  far  the  larger  part  of  rail- 
road capital  is  provided  by  bonds,  an  issue  of  $100,000,000  of 
bonds  now  being  not  at  all  unusual;  manufacturing  and  other 
industries  are  also  provided  with  much  capital  through  bond 
issues.  These  bonds  constitute  the  investment  side  of  corporate- 
finance,  while  the  speculative  side  is  in  general  represented  by 
the  stocks. 

Jacob's  Law  Dictionary  says:  "The  etymology  of  the  term 
Broker  has  been  variously  given.  By  some  it  has  been  derived 
from  the  Saxon  loroc,  misfortune,  as  denoting  a  broken  trader; 
the  occupation  being  formerly  confined,  it  is  said,  to  unfortunate 
persons  of  that  description  (Tomlins).  According  to  others  it 
was  formed  from  the  French  broieur,  a  grinder  or  breaker  into 
small  pieces,  a  broker  being  one  who  beats  or  draws  a  bargain 
into  particulars  (Termes  de  la  Ley,  Cowell).  The  law  Latin 
from  obrocaior,  however,  seems  to  point  distinctly  to  the  Saxon 
abroecan  (to  break)  as  the  true  root,  which  in  the  old  word 
abbrochment,  or  abroachment,  had  the  sense  of  breaking  up 
goods  or  selling  at  retail.  A  broker,  therefore,  would  seem  to 
have  been  originally  a  retailer,  and  hence  we  find  the  old  word 
auctionarius  used  in  both  these  senses  (BarrilPs  Law  Diet.,  tit. 
'Broker').  Wharton  gives,  as  the  derivation  of  the  word,  the 
French  broceur,  and  the  Latin  tritor,  a  person  who  breaks  into 
small  pieces  (Whar.  Law  Diet.,  tit.  'Broker').  Webster  gives 
as  its  derivation  the  old  English  brocour,  Norman  French 
broggour,  French  brocanteur.  Under  the  word  'broke/  to  deal 
in  second-hand  goods,  to  be  a  broker,  Webster  says  it  is  probably 
derived  from  the  word  brock.  Worcester  derives  it  from  the 
Anglo-Saxon  brucan,  to  discharge  an  office ;  brocian,  to  oppress ; 
and  the  French  broyer,  to  grind.  The  word  'broker'  seems  first  to 
occur  in  literature  in  Pier's  Ploughman,  'Among  burgeises  have  I 
be  Dwellyng  at  London.  And  gart  Backbiting  be  a  brocour.  Tc 
blame  men's  ware."  It  clearly  means  here  a  fault-finder,  as  in 
Provengal  brae  is  refuse.  The  broker  was  originally  one  who  in- 


COMMERCIAL  MANIFESTATIONS  OF  CORPORATE  EXISTENCE     287 

spected  goods  and  rejected  what  was  below  the  standard  (Wedg- 
wood). Crabbs'  Dig.  of  Stat.,  tit.  'Brokers/  says:  'There  were  a 
class  of  persons  known  to  the  Komans  who  were  deemed  public 
officers,  and  who  united  the  functions  of  bankers,  exchangers, 
brokers,  commissioners  and  notaries  all  in  one  under  the  descrip- 
tion of  proxe  netae.' * 

In  1285  the  term  "broker"  occurs  in  an  act  of  parliament. 
John  E.  Dos  Passes  says :  "The  next  statute  passed  in  the  reign 
of  James  the  First,  more  than  300  years  later  (1604),  regulates 
the  calling  of  brokers  with  greater  detail  than  the  first  act  and 
clearly  shows,  by  the  use  of  the  words  'merchandise  and  wares/ 
that  down  to  this  period  the  broker  in  money,  stock  and  funds 
had  no  legal  existence.  *  *  *  It  was  not  until  the  latter 
part  of  the  seventeenth  century,  when  the  East  India  Company 
came  prominently  before  the  public,  that  trading  in  stock  be- 
came an  established  business  in  England ;  and  the  term  'broker/ 
which  had  then  a  well-understood  meaning,  was  promptly 
transferred  to  those  persons  who  were  employed  to  buy  or  sell 
stocks  or  shares,  and  who  thenceforth  became  known  as  stock 
brokers."* 

In  1697,  because  of  unjust  practices  and  designs  of  brokers 
and  stock  jobbers,  an  act  was  passed  which  permitted  only  sworn 
appointees  to  act  as  brokers.  A  sixteenth  century  writer  on 
law  said:  "It  is  an  old  proverb,  and  very  true,  that  between 
what  you  will  buy?  and  what  you  will  sell?  there  is  twenty  in 
the  hundred  differing  in  the  price,  which  is  the  cause  that  all 
the  nations  do  more  affect  to  sell  their  commodities  with  repu- 
tation by  means  of  brokers  than  we  do,  for  that  which  seems  to 
be  gotten  thereby  is  more  than  double  lost  another  way.  Besides, 
that  by  that  course  many  differences  are  prevented  which  arise 
between  man  and  man  in  their  bargains  or  verbal  contracts,  for 
the  testimony  of  a  sworn  broker  and  his  book  together  is  sufficient 
to  end  the  same."  The  advantage  of  a  broker  as  intermediary 
was  thus  early  recognized  by  merchants. 

Trading  associations  have  existed  for  centuries.    Angel  and 

*  Stock  Brokers  and  Stock  Exchanges,  Dos  Passes. 


288  MODERN   BUSINESS    CORPORATIONS. 

Ames  on  Private  Corporations  says :  "A  Collegium  Mercatorium 
[society  of  merchants]  existed  at  Rome  493  B.  C.,  but  the  modern 
bourse,  from  the  Latin  bursa,  a  purse,  originated  about  the  fif- 
teenth century.  Bourges  and  Amsterdam  contend  for  the  honor 
of  having  erected  the  first  bourse."  The  early  exchanges,  or 
bourses,  dealt  in  merchandise.  The  stock  exchange  developed 
with  the  development  of  stock  trading.  About  1675  dealers  in 
stocks  and  merchandise  dealt  together  in  an  exchange  in  Corn- 
hill,  London,  and  in  1698  the  dealers  in  stocks  obtained  ex- 
clusive quarters.  The  London  stock  exchange  was  formed  in 
1773.  About  forty  years  later  a  stock  market  began  to  develop  in 
Wall  street.  Philadelphia  had  the  first  American  stock  exchange, 
organized  in  the  early  part  of  the  nineteenth  century.  The  New 
York  stock  exchange  was  formed  in  1817.  Many  other  large 
cities  now  have  exchanges.*  European  bourses  exist  by  special 
legislation  and  are  subject  to  control  of  governments,  while  in 
England  and  America  the  stock  exchanges  are  free  from  gov- 
ernment regulation. 

*See  The  Work  of  Wall  Street,  Pratt,  Chs.  I  and  VIII. 


UNINTELLIGENT  COMPETITION. 

Incidental  suggestions  that  should  be  of  value  to  business 
corporations,  large  and  small,  are  contained  in  an  article,  en- 
entitled  Unintelligent  Competition  a  Large  Factor  in  Making 
Industrial  Consolidation  a  Necessity,  which  was  contributed  to 
the  North  American  Eeview  by  Mr.  James  Logan,  general  man- 
ager of  the  United  States  Envelope  Company.  The  following 
abstract  is  reprinted  by  kind  permission : 

"The  belief  is  quite  general,  in  certain  directions,  that  all  com- 
binations and  consolidations  are  organized  to  stamp  out  competi- 
tion and  advance  prices  unduly.  Without  doubt,  many  consolidations 
have  been  organized  with  that  end  in  view;  but  there  are  many 
others  which  have  been  organized  to  correct  abuses  which,  on  ac- 
count of  ignorance  and  lack  of  intelligence,  have  become  fastened 
upon  many  lines  of  industry  and  which  threatened  their  destruc- 
tion. The  fact  is  not  lost  sight  of  that  the  promoter  has  been  one 
of  the  largest  influences  in  the  work  of  consolidation,  but  ignorant, 
unequal,  even  dishonest  competition  in  business  has  brought  many 
industries  to  such  a  condition  that  manufacturers  were  willing  to 
listen  to  the  plans  of  the  promoter,  or  to  any  schemes  which  gave 
promise  of  even  partial  relief. 

"Usually  one  of  the  first  things  done  by  a  consolidation  is  to  re- 
vise its  price  lists.  Then  there  goes  up  a  great  hue  and  cry  about 
trusts,  monopolies,  squeezing  the  public,  etc.,  by  advancing  prices, 
as  though  it  were  a  crime  to  be  unwilling  to  sell  goods  at  a  loss  or 
without  a  profit.  After  a  consolidation  has  been  brought  about,  manu- 
facturers have  the  opportunity  to  compare  notes  and  see  how  buyers 
have  worked  one  manufacturer  against  another,  until  certain  classes 
of  goods  have  been  sold  for  much  less  than  they  cost.  These  low 
prices  have  been  largely  made  by  ignorant  manufacturers,  who  did 
not  know  what  they  were  doing;  manufacturers  who  conducted  their 
business  by  the  rule  of  thumb;  men  who  had  not  the  capacity  even 
to  appreciate  system,  to  say  nothing  of  originating  it.  When  con- 
solidations are  effected,  that  kind  of  ability  usually  goes  to  the  rear, 
and  the  more  intelligent  men  take  control,  men  who  know  more 
MOD.  Bus.  CORP.— 19 

289 


290  MODERN   BUSINESS   CORPORATIONS. 

nearly  what  it  costs  to  manufacture  goods.  And  yet  the  buyer  and 
the  public  expect  the  manufacturer  to  continue  in  force  the  prices, 
made  by  the  ignoramus  who  has  been  superseded;  and  manufac- 
turers are  expected  to  sell  at  a  loss,  or  without  a  profit,  simply  be- 
cause ignorant,  cutthroat  competition  forced  them  to  do  so  when 
they  were  powerless  to  prevent  it. 

"The  consolidation  of  industrials  has  made  it  possible  to  ascer- 
tain how  business  has  been  conducted  by  competing  firms,  and  the. 
methods,  or  lack  of  methods,  of  some  have  been  a  revelation. 

"It  has  been  my  pleasure  to  form  the  acquaintance  of  the  man- 
agers of  no  less  than  six  consolidations  in  different  industries,  and 
the  experience  of  one  is  the  experience  of  all.  In  some  of  the  com- 
panies consolidated,  they  had  never  known  the  cost  of  manufactur- 
ing their  goods;  there  had  never  been  an  intelligent  attempt  to 
learn  the  cost.  The  principle  on  which  they  appear  to  have  acted 
was  this:  If  one  manufacturer  quoted  for  an  article  a  dollar,  they 
knew  they  could  make  it  for  less  than  he  could,  and  so  quoted  ninety 
cents.  There  was  an  absolute  lack  of  system  in  everything,  save  in 
one  particular — their  system  of  price  cutting  without  regard  to  cost 
was  perfect. 

"Another  fact  has  been  discovered  in  every  one  of  the  six  con- 
solidations referred  to;  the  firms  or  corporations  consolidated  were 
successful,  prior  to  the  consolidation,  just  in  proportion  as  they  ad- 
hered to  a  fixed  standard  for  their  goods,  giving  to  their  trade  ex- 
actly what  they  agreed  to  give.  In  other  words,  the  firms  which 
made  the  best  goods  had  the  most  satisfactory  trade,  paid  their  help 
the  highest  wages,  and  made  the  most  money;  and  those  who  made 
the  poorest  goods  paid  their  help  the  lowest  wages,  and  made  the 
least  money. 

"It  may  be  asked,  why  do  not  firms  which  conduct  their  business 
on  this  basis  fail?  and  the  reply  is,  they  do.  This  country  is  strewn 
with  the  wrecks  of  such  firms,  which  fail  time  and  again,  compro- 
mise with  their  creditors  and  go  on  again,  to  continue  their  un- 
equal and  ignorant  competition.  One  of  the  hardest  problems  hon- 
est business  men  have  to  face  is  to  try  to  do  business  in  competition 
with  others  who  own  their  goods  through  failure  and  compromise 
at  anywhere  from  ten  to  fifty  cents  on  the  dollar.  The  ruinous 
feature  of  this  kind  of  competition  is  that  other  manufacturers  and 
merchants  who  do  know  their  costs  are  in  a  degree  forced  to  travel 
at  the  same  pace.  A  manufacturer  cannot  hope  to  sell  for  a  dollar 
what  a  competitor  will  sell  for  ninety  cents,  not  even  though  the 
article  in  question  costs,  under  the  most  favorable  conditions,  a  dol- 
lar and  ten  cents  to  produce  it. 

"Competition  is  industrial  war,  and,  like  war,  it  is  being  reduced. 


UNINTELLIGENT   COMPETITION.  291 

to  a  science.  Ignorant,  unrestricted  competition,  carried  to  its  logical 
conclusion,  means  death  to  some  of  the  combatants  and  injury  for 
all.  Even  the  victor  does  not  soon  recover  from  the  wounds  re- 
ceived in  the  conflict. 

"We  have  had  in  this  country  great  natural  resources  to  develop.  ; 
We  have  been  for  years  throwing  away  more  than  would  to-day  be 
looked  upon  in  the  older  countries,  and  in  some  lines  of  business  in 
our  own  country,  as  a  handsome  margin  of  profit.  In  manufacturing 
industries,  one  invention  has  followed  another  in  rapid  succession, 
and  the  margin  of  profit  has  been  such  that  it  has  not  been  deemed 
necessary  to  know  exactly  what  the  costs  of  production  actually 
were. 

"It  has  become  a  commonplace  to  say  that  'the  wastes  of  one  de- 
cade are  the  profits  of  the  next.'  In  many  lines  of  industry  that 
statement  is  well  inside  the  truth;  but  we  are  approaching  a  time, 
if  it  has  not  already  been  reached  in  some  industries,  where  it 
would  seem  as  though  the  cost  of  production  could  not  be  materially 
reduced  by  the  saving  of  wastes,  or  by  the  invention  of  improved 
machinery — the  cost  of  running  the  machine  in  some  industries  be- 
ing such  a  small  fraction  of  the  total  cost  that,  even  though  the 
machine  were  run  for  nothing,  the  cost  would  not  be  greatly  reduced. 

"The  father  and  mother  of  the  Trade  family  are  Supply  and  De- 
mand. The  first-born  (and  he  is  the  legitimate  offspring  of  these 
parents)  is  Competition.  This  child  being  more  often  than  other- 
wise untrained  and  ignorant,  frequently  works  untold  hardship  on 
the  Trade  family.  Although  great  harm  is  done  by  this  untrained 
and  ignorant  member  of  the  family,  it  does  not  follow  that  the  child 
should  be  strangled  and  put  out  of  the  way,  any  more  than  an  un- 
trained and  ignorant  child  in  a  human  family  should  be  so  dealt 
with;  but  he  should  be  restrained,  educated,  trained  and  directed,, 
in  order  that  he  may  be  made  competent  to  do  his  full  share  of 
work.  The  progress  of  the  world  in  everything  has  been  by  keem 
competition,  in  schools  as  well  as  in  industries.  Men  need  the  stimu- 
lus of  competition  to  do  their  best.  To  it  we  owe  our  development. 
It  is  the  fuel  which  feeds  the  fire  of  ambition,  and  up  to  a  certain 
point  is  a  good  thing  (if  the  competition  is  intelligent  rather  than 
ignorant),  but,  like  almost  any  other  good  thing,  it  can  be  abused. 

"There  must  always  be  competition.  To  stamp  it  out,  were  such 
a  thing  possible,  would  mean  stagnation  and  death.  It  would  mean 
that  there  was  to  be  no  further  progress;  and  it  is  no  compliment 
to  the  intelligence  of  the  business  men  who  have  done  so  much  for 
the  progress  of  the  world  to  suggest  even  that  they  are  so  short- 
sighted as  to  believe  that  that  program  could  be  carried  out. 

"If  there  were  no  prizes. to  be  obtained,  men  would  cease  to  put 


292  MODERN   BUSINESS    CORPORATIONS. 

forth  the  effort,  which  makes  for  progress  and  growth.  If  there 
were  no  larger  prizes  ahead  of  a  young  man  than  simply  a  day  la- 
borer's wages,  the  likelihood  is  that  a  good  many  would  not  put 
forth  the  effort  necessary  to  become  anything  more  than  a  day  la- 
borer; but  because  there  are  prizes  to  be  gained  by  competition,  men 
are  willing  to  become  practically  slaves  to  their  business  or  profes- 
sion, and  in  gaining  those  prizes  for  themselves  they  make  large 
contributions  to  the  sum  of  human  progress  and  happiness.  We 
need  competition  if  we  would  grow,  but  it  ought  to  be  honest  and 
intelligent  competition,  and  that  is  not  what  is  being  had  under 
conditions  which  prevail  in  many  lines  of  industry  at  the  present 
time. 

"Some  months  after  the  consolidation  of  one  of  the  leading  in- 
dustries in  this  country,  in  conversation  with  the  gentleman  who 
was  at  the  head  of  the  cost  department  of  one  of  the  firms  which 
had  been  consolidated  (and  it  was  the  leader  in  that  line  of  in- 
dustry), I  learned  that  an  order  had  recently  been  sent  for  estimate 
to  his  old  company,  and  that  they  had  figured  on  the  order  and  lost 
it,  prior  to  the  consolidation.  They  had  known  there  would  be  close 
competition,  and  they  had  gone  over  their  cost  figures  very  care- 
fully, putting  the  price  on  the  lowest  possible  basis;  but  when  the 
bids  had  been  opened,  other  bidders'  prices  were  so  far  below  theirs 
that  they  were  made  to  appear  foolish.  They  had  reviewed  their 
figures,  and  could  not  understand  how  the  party  to  whom  the  award 
had  been  made  could  sell  the  goods  without  loss  at  the  price  at 
which  the  contract  had  been  awarded.  When  the  companies  were 
consolidated,  the  management  had  taken  the  order  from  the  branch 
which  had  secured  the  contract,  and  had  sent  it  for  execution  to 
this  branch  whose  figures  were  so  much  higher,  thereby  acknowl- 
edging that  their  facilities  for  doing  the  work  were  better  than 
those  of  the  company  which  had  been  awarded  the  contract.  A  let- 
ter was  written  to  the  company  which  had  secured  the  order  ask- 
ing that  they  furnish  the  data  on  which  they  had  based  their  figures. 
To  this  letter  they  made  an  evasive  reply.  Another  letter  was  writ- 
ten, and  again  came  back  a  letter  equally  evasive.  The  matter  was 
then  taken  up  through  the  manager's  office,  and  this  brought  forth 
a  letter  which  said  they  had  no  detail  of  the  figures  of  their  estimate 
to  submit;  they  had  done  work  something  like  this,  and  felt  sure 
they  could  do  this  at  the  price  they  had  submitted,  and  that  was  all 
the  information  that  could  be  obtained.  The  order  was  filled  at  a 
very  considerable  loss. 

"Now  for  the  application.  The  company  to  which  the  order  was 
sent  for  execution  had  not  failed  to  pay  a  dividend  but  once  in  over 
thirty  years.  The  company  which  secured  the  contract  at  the  low 


UNINTELLIGENT   COMPETITION. 

price  had  not  paid  a  dividend  for  seven  years,  and  under  existing 
conditions  and  management  was  not  likely  to  pay  one  for  seven 
years  more. 

"A  successful  firm  is  not  produced  by  chance,  but  by  intelligence 
persistently  applied;  and  this  successful  firm  had  made  its  dividends 
fully  as  much  by  orders  which  it  had  not  accepted  as  by  orders  it 
had  accepted.  They  knew  where  profit  ended  and  where  loss  began; 
and  when  it  became  a  question  of  paying  a  customer  to  do  his  busi- 
ness, they  had  let  the  other  manufacturer  have  that  privilege. 

"The  competition  hardest  to  meet  is  not  usually  that  of  successful 
firms,  who  know  what  they  are  doing,  but  of  firms  whose  business 
creed  appears  to  be  summed  up  in  the  lines : 

"  'So  on  I  go  not  knowing, 
'Tis  blessed  not  to  know/ 

These  are  the  firms  which  fail,  and  whose  competition  often  causes 
others  to  fail;  and  the  cause  of  their  failure  is  largely  the  result  of 
ignorance  of  the  cost  of  production  to  the  manufacturer  or  the  cost 
of  doing  business  to  the  merchant.  For  such  ignorance,  indeed, 
they  are,  in  many  cases,  not  entirely  to  blame. 

"Men  rarely  go  into  business  directly  from  the  ranks  of  industry. 
The  offshoots  from  the  established  houses  are  usually  heads  of  de- 
partments, office  men,  superintendents  and  foremen,  and  I  suppose 
it  is  well  inside  the  truth  to  say  that  nine  out  of  every  ten  such 
employes,  kept  in  ignorance  of  the  true  condition  of  business,  be- 
lieve their  employers  to  be  making  profits  very  greatly  in  excess 
of  the  amounts  actually  made. 

"The  great  majority  of  business  men  endeavor  to  keep  the  details 
of  their  business  to  themselves.  They  want  to  have  as  few  as  pos- 
sible of  the  men  connected  with  their  business  know  the  cost  of 
their  goods  and  what  profits  they  are  making.  The  result  is  that 
many  of  these  men  have  no  knowledge  of  the  costs  of  production  to 
a  manufacturer,  and  are  wholly  lacking  in  a  knowledge  of  what  it 
costs  to  do  business  as  a  merchant. 

"The  point  I  would  make  is  this:  Is  it  wise  to  let  such  men 
think  that  the  costs  of  doing  business  as  a  merchant  are  simply 
store  rent  and  clerk  hire,  and  the  costs  of  manufacturing  are  sim- 
ply thoce  larger  items,  like  labor,  rent,  heat,  power,  etc.,  which 
stand  out  prominently,  leaving  out  of  their  thought  the  services  of 
the  proprietor,  and  that  multitude  of  other  costs,  many  of  the  items 
small  in  themselves,  but  in  the  aggregate  the  mighty  factor  which 
decides  whether  the  balance  is  to  be  on  the  right  or  wrong  side  of 
the  profit  and  loss  account;  to  let  them  go  on  guessing  that  the 
profits  of  the  business  are  two  or  three  times  what  they  actually 
are;  to  keep  them  in  ignorance  of  the  true  condition  of  the  business, 


MODERN   BUSINESS   CORPORATIONS. 

"which,  if  known  to  them,  would  in  thousands  of  cases  remove  from 
them  the  temptation  to  start  in  business  for  themselves,  and  thus 
prevent  a  large  part  of  the  competition  that  kills?  Such  men  are 
not  entirely  to  blame  that  they  have  not  the  capacity  to  carry  a 
'Message  to  Garcia.'  They  have  never  had  an  opportunity  to  do 
work  that  would  fit  them  for  such  service,  and  their  employer  often 
could  not  carry  a  'Message  to  Garcia'  either.  Would  it  not  be  wiser 
to  adopt  the  other  course,  to  train  and  educate  a  man  so  that  he  may 
become  more  valuable  to  the  firm?  A  man  cannot  grow  and  use 
good  judgment  in  business  matters,  if  a  knowledge  of  the  facts, 
which  is  the  basis  for  judgment,  is  withheld.  Men  do  not  expect 
growth  in  anything  else  where  the  means  of  growth  are  cut  off. 
Why  chould  they  in  business?  Then,  if  the  man  grows,  pay  him  for 
this  increased  efficiency,  of  which  the  firm  gets  the  benefit;  and 
when  that  is  done,  if  such  a  man  does  go  into  business  on  his  own 
account,  he  will  be  an  intelligent,  rather  than  an  ignorant,  com- 
petitor. 

"Statistics  are  often  quoted  which  show  that  only  a  very  small 
percentage  of  the  men  who  embark  in  business  on  their  own  ac- 
count succeed — those  who  have  given  the  matter  careful  thought 
say  from  three  per  cent,  to  five  per  cent.  Whether  that  be  correct 
or  not,  I  do  not  pretend  to  say;  but  this  we  do  know,  a  large  per- 
centage do  not  succeed. 

"There  is  reason  for  this  enormous  commercial  death  rate;  and, 
in  my  opinion,  one  of  the  chief  causes  is  bad  accounting,  and,  as  a 
consequence,  ignorance  of  cost  of  production,  as  a  manufacturer, 
and  of  doing  business,  as  a  merchant. 

"Many  men  accounted  shrewd,  having  no  knowledge  of  accounts 
themselves,  utterly  fail  to  appreciate  the  real  purpose  of  bookkeep- 
ing and  accounting,  and  act  on  the  assumption  that  any  boy  or 
girl  just  out  of  school,  who  can  be  hired  at  the  smallest  salary  and 
who  is  wholly  lacking  in  business  training,  is  competent  to  do  their 
bookkeeping.  That  might  be  true  if  the  only  function  of  book- 
keeping were  to  see  that  sales  were  properly  charged  and  accounts 
collected  when  due.  That  work  is  essential  and  must  be  done  cor- 
rectly, if  one  would  remain  solvent;  but  there  is  another  function 
which  is  equally  important  and  which  is  too  often  neglected.  Books 
of  account  should  be  so  kept  that,  at  the  end  of  each  period,  there 
could  be  made  up  a  statement  of  the  business  in  each  department 
in  all  its  detail,  giving  the  detailed  costs  connected  with  the  busi- 
ness. It  is  not  enough  that  these  costs  should  go  into  a  few  general 
accounts.  They  must  be  subdivided  so  that  comparisons  can  be 
made  from  year  to  year.  If  costs  are  increasing,  the  comparisons 
will  reveal  the  fact;  if  there  are  leaks,  they  will  be  detected  and 


UNINTELLIGENT   COMPETITION.  295 

stopped;  but  that  work  requires  brains  and  business  training,  and 
the  salary  investment  made  in  employing  a  competent  accountant 
will  yield  large  returns,  giving  to  the  management  facts,  not  guesses, 
in  the  matter  of  cost  of  production. 

"The  demands  of  the  new  century  will  not  admit  of  guesswork. 
The  management  of  the  future  must  have  a  definite  knowledge  of 
the  cost  of  production — not  in  a  vague  and  general  way,  but  in  a 
concrete  and  specific  way.  Success  by  the  rule  of  thumb  has  gone 
forever,  and  in  the  years  to  come  success  will  be  won  only  through 
exact  and  definite  knowledge. 

"The  manufacturer's  endeavor  is  to  reduce  the  cost  of  production, 
but  there  are  two  mighty  forces  at  work  all  the  time  to  reduce  the 
price  just  a  little  faster  than  the  manufacturer  can  reduce  the  cost. 
These  are  the  buyer  and  the  traveling  salesman,  and  they  have 
helped  to  make  consolidations  a  necessity. 

"The  manufacturer  who  is  ignorant  of  cost  will  usually  be  ignor- 
ant of  other  conditions  connected  with  his  business,  and  both  he 
and  his  salesman  will  be  at  the  mercy  of  the  unscrupulous  buyers. 
All  buyers  are  not  unscrupulous,  and  there  is  something  to  be  said 
in  behalf  of  the  salesman.  The  writer  has  been  a  salesman  for  over 
five  and  twenty  years.  He  has  been  in  the  employ  of  others,  and  he 
has  for  years  sold  his  own  goods,  so  that  he  is  not  giving  hearsay 
evidence  of  conditions. 

"The  traveling  salesman's  burden  is  not  an  easy  one  to  bear. 
From  Monday  morning  till  Saturday  night  he  hears  one  story  from 
the  buyer:  'He  is  not  in  it,  not  even  a  little  bit;'  'his  prices  are 
not  right;'  'we  have  quotations  much  more  favorable;'  'so-and-so 
has  agreed  to  deliver;'  'another  one  will  give  three  months'  dat- 
ing;' 'at  even  prices  they  prefer  to  give  him  an  order,'  and  so  on. 
Such  statements  may  be  true,  and  they  may  not. 

"After  the  consolidation  of  the  company  of  which  I  have  an  inti- 
mate knowledge,  the  correspondence  which  had  passed  between  the 
several  companies  and  buyers  from  all  over  the  country  was  open 
for  inspection ;  so  also  was  the  correspondence  sent  in  prior  to  the 
consolidation  by  traveling  men,  as  to  what  the  other  manufacturers 
were  reported  to  be  quoting;  and  it  was  a  most  instructive  exhibit. 
Prices  which  had  never  been  quoted,  and  special  terms  which  ex- 
isted only  in  the  fertile  brain  of  the  buyer,  had  been  met  by  com- 
peting manufacturers.  Statements  were  made  by  buyers  as  to  the 
volume  of  their  business  which  were  wilder  than  political  estimates 
made  on  the  stump,  and  which  had  been  used  as  a  lever  to  get  quota- 
tions and  terms  to  which  the  party  making  them  was  not  entitled. 

"The  salesman's  position  is  dependent  upon  the  business  which 
he  obtains.  His  orders  must  be  obtained  from  the  buyer,  with  whom 


296  MODERN   BUSINESS   CORPORATIONS. 

he  must  keep  on  good  terms  to  obtain  orders.  In  time,  he  often  be- 
comes better  acquainted,  and  on  terms  of  even  greater  intimacy, 
with  the  buyer  than  with  the  house  which  he  represents.  The  re- 
sult is  that  pretty  much  anything  the  buyer  asks  for  he  can  have. 
The  traveling  man  will  say  to  his  house  that  he  cannot  retain  the 
trade  unless  the  concessions  asked  are  granted;  and,  as  often  hap- 
pens, the  manufacturer,  being  known  to  the  buyer  only  through 
the  salesman,  is  completely  at  their  mercy,  and  accepts  the  condi- 
tions laid  down. 

"Add  to  this  the  fact  that  the  manufacturer  himself  does  not 
know  the  cost  of  his  goods;  does  not  know  where  profit  ends  and 
where  loss  begins;  and,  of  course,  the  traveling  salesman  cannot 
know  under  those  conditions.  He  more  often  than  otherwise  only 
knows  the  selling  price  which  has  been  given  him,  and,  no  matter 
what  that  price  may  be,  his  assumption  is  that  it  involves  a  large 
profit.  And  when  a  salesman  goes  out  on  the  road,  even  with  a 
schedule  of  the  lowest  prices,  usually  his  final  instructions  from 
the  man  who  does  not  know  his  cost  is  to  "get  the  orders,  and,  if 
it  is  necessary  to  cut  those  prices,  to  cut  them,"  and  with  such 
instructions  the  prices  are  cut. 

"There  are  many  large  firms  and  corporations  to-day  conducting 
their  business  by  the  old  rule  of  thumb,  and  that  will  one  day  pro- 
duce their  downfall.  Not  having  wrought  out  an  intelligent  system 
of  accounting  while  the  business  was  being  developed,  they  now 
find  themselves  handicapped  by  a  lack  of  system  and  a  lack  of 
knowledge  of  cost,  which,  with  the  small  margin  of  profits  which 
must  rule  for  the  future,  is  so  essential  if  a  manufacturer  would 
succeed.  Worse  still,  they  are  handicapped  by  a  force  of  men  in 
their  several  departments  who,  never  having  given  much  thought 
to  such  detail,  utterly  fail  to  appreciate  its  importance,  many  of 
them  being  now  past  the  time  of  life  when  they  are  willing  to  learn 
new  ways. 

"Almost  every  corporation,  firm  and  educational  institution  has 
connected  with  it  a  certain  proportion  of  men  who  act  as  brakes  on 
the  wheels  of  progress.  Being  too  old  to  take  up  new  methods,  they 
set  themselves  squarely  across  the  path  of  progress,  and  not  only 
refuse  to  advance  themselves,  but  make  it  next  to  impossible  for 
others  to  make  headway — their  argument  being  that  this  is  the  way 
in  which  work  has  been  done;  these  are  the  methods  we  have  fol- 
lowed for  years ;  they  have  been  good  enough  in  the  past,  they  ought 
to  be  good  enough  now. 

"Many  of  these  men  have  been  connected  with  the  business  for  a 
lifetime;  and,  in  their  thought,  years  of  inefficient  service  ought  to 
count  as  an  equivalent  for  efficiency.  They  have  been  engaged  in  the 


UNIVERSITY 

^W  -'^ 

UNINTELLIGENT    COMPETITION.  297 

industry  so  long  that  they  labor  under  the  impression  that  they 
know  all  that  there  is  to  be  known ;  and  their  very  conceit  closes  up 
the  avenue  through  which  light  could  and  would  come  to  make  them 
more  efficient,  if  they  would  but  let  it. 

"Again,  there  is  another  class  of  men  who  are  and  have  been 
for  years  agents,  superintendents  and  foremen,  who  were  never 
fitted,  either  by  natural  endowment  or  acquired  ability,  to  fill  such 
positions.  They  would  never  have  been  selected  for  their  present 
posts,  but  in  the  early  days  of  the  business  they  drifted  into  their 
places,  and  they  have  drifted  ever  since. 

"Consolidations  are,  for  the  most  part,  made  up  of  firms  which 
have  grown  up  from  very  small  beginnings.  Twenty-five  years  ago 
it  was  exceptional  for  factories  to  begin  with  any  considerable  work- 
ing force.  They  usually  started  small,  and,  from  time  to  time,  as 
the  business  increased,  added  to  their  plant.  Now  that  has  been  all 
changed;  and  a  plant  is  created  in  three  or  six  months  which  starts 
fully  equipped  and  capable  of  turning  out  a  product  as  large  as  that 
of  firms  that  have  been  working  to  build  up  a  trade  for  a  score  of 
years. 

"The  agents,  superintendents,  foremen  for  such  new  plants,  usu- 
ally being  drawn  from  other  going  concerns,  are  selected  because  of 
their  fitness. 

"The  old  method  was  very  different.  For  example:  In  an  office  a 
young  man  was  hired  as  bookkeeper,  and  he  did  pretty  much  all  the 
office  work  that  was  not  done  by  the  proprietor.  In  time,  as  business 
grew,  another  clerk  was  hired.  In  the  course  of  years  the  office  staff 
had  grown  till  there  were  a  dozen  clerks,  and  the  man  who  chanced 
to  be  the  first  had  been  promoted  at  different  times  until  he  came 
to  be  the  agent  or  superintendent.  But  he  had  stopped  growing  long 
ago,  and  simply  held  a  position  which  he  never  filled.  His  being 
there,  however,  had  prevented  some  one  else  from  filling  it  who 
could,  and  who,  had  he  been  given  the  opportunity,  would  have  ren- 
dered a  larger  service.  Had  the  inefficient  man  been  set  aside  and 
the  progressive,  efficient  man  put  in  his  place,  the  business  would, 
perhaps,  have  been  saved  from  bankruptcy,  and  instead  of  the  com- 
pany dying  of  dry  rot,  it  might  be  giving  employment  to  hundreds 
of  other  employes.  This  illustration  applies  with  equal  force  to 
many  of  the  departments  connected  with  almost  every  manufactur- 
ing establishment. 

"The  management  of  the  consolidation  is  severely  criticised  be- 
cause it  refuses  to  be  handicapped  by  such  men,  and  in  making 
changes  it  often  works  hardship  to  the  individual;  but  continuing 
an  inefficient  man  in  a  position  which  he  did  not  fill  wrought  hard- 
ship to  the  efficient  man  who  was  kept  out  of  it,  and  also  to  hun- 


298  MODERN   BUSINESS   CORPORATIONS. 

dreds  of  employes  who  have  been  deprived  of  work  which  the  other 
man's  ability  would  have  provided.  So  that  the  hardship  is  not  all 
on  one  side. 

"Consolidations  have  closed  factories  and  have  thrown  many  faith- 
ful and  efficient  employes  out  of  work.  But  every  failure  through 
such  inefficiency  as  has  been  described  has  done  the  same  thing; 
and,  in  many  cases,  had  the  consolidation  not  been  brought  about, 
failure  would  have  been  the  next  step. 

"Then  again,  owing  to  antiquated  equipment,  poor  management  or 
economic  conditions,  it  is  simply  impossible  to  operate  some  fac- 
tories except  at  a  loss;  and  even  though  the  consolidation  had  not 
been  consummated,  many  factories  which  have  been  closed  by  the 
consolidation  would  have  been  closed  by  the  operation  of  economic 
law.  The  final  result  has  simply  been  anticipated  a  little,  and  not 
a  great  while  either. 

"A  gentleman  who  was  connected  with  a  line  of  industry  which 
had  recently  been  brought  under  consolidation  said  to  me  that  the 
consolidation  had  discharged  three  men,  and  that  he  was  now  work- 
ing four  times  as  hard  as  he  did  formerly.  I  suggested  that  a  man 
was  somewhat  better  than  a  machine  and  more  was  expected  of 
him;  but  that,  if  he  had  in  his  factory  a  machine  from  which  he 
could  get  only  25  per  cent,  of  efficiency  he  would  throw  it  into  the 
junk  heap,  and  if  he,  as  a  man,  drawing  a  good  salary,  had  been 
only  rendering  25  per  cent,  of  his  efficiency,  he,  too,  was  entitled  to 
a  place  in  the  scrap  heap.  In  this  day  and  generation,  25  per  cent, 
of  efficiency  means  to  step  out  and  give  some  one  else  a  chance, 
who  can  and  will  work  at  higher  pressure  and  render  larger  service." 


ADVANTAGE  OF  FOREIGN  CORPORATIONS  IN 
COURTS. 

Corporations  sometimes  desire  to  be  incorporated  in  another 
state  than  that  in  which  their  business  is  located  so  as  to  be  able 
to  have  suits  transferred  to  the  federal  courts.  A  corporation  of 
one  state,  doing  business  in  another  state,  has  the  right  to  bring 
suits  in  the  latter  state  in  the  United  States  courts  instead  of  the 
courts  of  the  state,  if  the  amount  involved  exceeds  two  thousand 
dollars.  And  if  a  suit  involving  that  amount  or  more  is  brought 
against  such  a  corporation  in  a  state  court  it  has  the  right  to  re- 
move the  cause  to  the  United  States  court  for  trial  and  judg- 
ment. This  privilege  is  given  by  the  constitution  of  the  United 
States  to  non-resident  citizens,  and  is  enjoyed  by  corporations 
equally  with  individuals  bringing  or  defending  suits  outside  of 
the  states  of  their  residence.  It  is  granted  for  the  purpose  of  re- 
lieving non-residents  of  the  effect  of  any  local  prejudice,  and  a 
non-resident  corporation  may  waive  the  privilege  and  sue  or  de- 
fend in  the  state  courts  like  a  resident  corporation  if  it  chooses 
to  do  so. 


299 


APPENDIX 


301 


APPENDIX. 

Rules  of  New  York  Stock  Exchange  on  Admission  of  Securities. 
RULES  PEBTAINING  TO  THE  ADMISSION  OF  LISTED  SECURITIES. 


COMMITTEE  ON  STOCK  LIST. 

April  15,  1901. 

1.  The  committee  on  stock  list  will  meet  on  each  Monday  at  3 : 30 
p.  M.  at  the  offices  of  the  exchange. 

All  applications  to  list  securities  must  be  addressed  to  the  com- 
mittee and  should  be  filed  with  the  secretary  of  the  exchange  on  or 
before  the  Wednesday  prior  to  their  consideration. 

REQUIREMENTS  FROM  APPLICANTS. 

2.  In  all  cases  of  application  for  an  original  listing  of  either  stocks 
or  bonds  of  railroad  companies,  it  is  required  that  there  shall  be 
filed  a  STATEMENT  of  the  location  and  description  of  the  property, 
and  when  possible  also  a  map  thereof.   Said  statements  should  give 
title  of  the  company,  when  the  corporation  was  organized,  and  by 
what  authority,  route  of  road,  miles  of  road  completed  and  in  opera- 
tion, contemplated  extensions,  equipment,  liabilities  and  assets,  earn- 
ings, amount  and  description  of  mortgage  lien  or  other  indebtedness; 
also  a  statement  of  and  liability  for  any  leases,  guarantees,  rentals 
or  car  trusts,  and  terms  of  payment  thereof-  clso  the  number  of 
shares  of  capital  stock  authorized;  the  p.     value  thereof,  a  list  of 
officers  and  directors,  the  office  of  the  company,  transfer  office  and 
registrar;  together  with  names  of  transfer  officer  and  registrar.   If 
it  is  a  reorganization  of  another  company,  the  particulars  should  be 
stated,  as  required  by  Paragraph  5.    SEVEN  COPIES  of  this  statement 
in  type,  or  typewritten,  SIGNED  BY  AN  OFFICER  OF  THE  COMPANY,  should 
be  furnished  to  the  committee,   together  with  a   like  number  of 
copies  of  trust  deeds,  mortgages,  or  other  corporate  agreements  per- 
taining to  the  application. 

3.  Applications  to  place  bonds  on  the  List  (SEVEN  copies  required) 
must  give  a  description  of  the  bonds,  viz.:  The  amount  of  authorized 
issue,  names  of  trustees,  date  of  issue  and  of  maturity,  the  par  value 
cf  each  kind  of  bond  issued,  series  of  numbers,  rate  of  interest,  when 

303 


304  MODERN   BUSINESS   CORPORATIONS. 

and  where  payable,  whether  the  bonds  are  subject  to  earlier  redemp- 
tion by  sinking  fund  or  otherwise,  whether  bonds  are  issued  in 
coupon  or  registered  form,  and  whether  they  are  transferable  into 
other  forms:  and  name  of  transfer  agent  and  place  of  transfer,  if 
said  bonds  have  privilege  of  registration.  The  application  should  also 
state  disposition  of  proceeds  of  the  issue,  and  must  be  accompanied 
by  a  balance  sheet  and  a  statement  of  income  account  of  a  recent 
date.  SEVEN  copies  of  the  mortgage,  one  being  certified  by  the  trus- 
tee to  be  a  true  and  correct  copy,  together  with  evidence  that  it  has 
been  duly  and  properly  recorded  as  a  lien  upon  the  property,  and 
similar  copies  of  other  corporate  documents  must  also  be  furnished. 
Bonds  upon  completed  mileage  ONLY  will  be  listed. 

4.  When  application  is  made  to  place  the  securities  of  any  rail- 
road corporation  upon  the  list,  the  applicant  must  present  a  cer- 
tificate from  a  duly  qualified  civil  engineer  stating  the  actual  phys- 
ical condition  of  the  property  as  of  a  recent  date. 

5.  When  application  is  made  to  list  securities  of  a  corporation, 
which  has  been  insolvent  or  has  been  reorganized,  the  exchange  will 
require  a  full  and  complete  financial  statement  of  said  corporation, 
or  of  its  predecessor,  for  a  period  covering  at  least  one  year  prior 
to  reorganization;   i.  e.,  a  detailed  statement  of  earnings  and  re- 
ceipts from  every  source,  a  detailed  account  of  all  expeditures,  and 
the  amount  of  all  outstanding  indebtedness  of  every  description  in 
detail,  and  a  balance  sheet  of  the  books  of  the  reorganized  company; 
also  the  amount  and  description  of  the  various  securities  issued  by 
such  reorganized  corporation,  and  the  purposes  and  terms,  in  detail, 
under  which  they  are  to  be  or  have  been  issued.    If  the  property 
has  been  sold  under  foreclosure,  copies  of  the  order  of  court  con- 
firming such  sale,  with  a  concise  history  of  the  proceedings,  must 
be  furnished,  together  with  certificate  from  counsel  that  the  pro- 
ceedings have  been  in  conformity  with  all  legal  requirements,  and 
that  the  title  to  the  property  is  now  fully  vested  in  the  new  corpora- 
tion and  is  free  from  all  liens  and  incumbrances,  except  as  distinctly 
specified. 

6.  When  bonds  are  issued,  which  by  their  terms  are  intended  to 
replace  one  or  more  authorized  prior  issues,  the  exchange  will  re- 
quire evidence  of  the  satisfaction  of  such  prior  liens,  or  a  cancella- 
tion or  cremation  certificate  of  the  bonds  retired,  as  a  condition 
precedent  to  listing. 

7.  Application  for  listing  additional  amounts  of  securities  of  rail- 
road companies,  already  represented  upon  the  exchange,  should  state 
the  amount  and  character  of  the  additional  issue,  the  authority 
therefor  and  the  application  of  the  proceeds;  if  for  the  acquisition 
of  new  property,  the  application  should  describe  said  property. 


APPENDIX.  305 

8.  In  every  case  of  listing  of  bonds,  the  committee  must  be  fur- 
nished with  a  certificate  from  the  county  clerk  of  each  county  in 
which  the  mortgaged  property  is  located,  that  such  mortgage  has 
been  recorded  in  each  of  such  counties;  should  the  laws  of  the  state  / 
in  which  the  property  is  located  not  require  a  record  to  be  made  id  .» 
the  several  counties,  a  certificate  of  the  secretary  of  said  stater  of 
the  proper  record  of  the  same,  or  a  copy  of  the  mortgage  with  such 
certificate  of  record  indorsed  thereon,  and  certified  by  the  trustee  to 
be  a  true  copy,  will  be  required. 

9.  Original  applications  to  list  any  securities  of  industrial  or  man- 
ufacturing companies  must  be  accompanied  by  a  copy  of  charter  or 
act  of  incorporation,  by-laws  of  the  company,  opinion  of  counsel  that 
the  company  has  been  legally  organized  and  that  the  securities  have 
been  legally  issued,  statement  whether  this  is  an  original  organiza- 
tion or  a  consolidation  of  several  previously  existing  firms  or  cor- 
porations;   if  a  consolidation,  statement  of  financial  and  physical 
condition  of  constituent  companies  must  be  furnished,  a  full  de- 
scription of  the  property,  real,  personal  and   leased;    nature  and 
character  of  product,  and  general  statement  of  the  business  pro- 
posed to  be  transacted;  opinion  of  counsel  that  real  estate  owned  is 
free  and  clear,  except  as  to  stated  liens;   report  of  responsible  ex- 
pert accountants,  showing  results  of  business  each  year  for  the 
period  of  at  least  two  consecutive  years  if  possible,  and  a  balance 
sheet  showing  assets  and  liabilities  of  recent  date;    statement  of 
special  rights  and  privileges  of  directors,  as  conferred  by  charter 
or  by-laws,  and  agreement  that  the  company  will  not  dispose  of  its  - 
stated  interest  in  the  constituent  companies  except  on  direct  author- 
ization of  stockholders,  and  that  it  will  publish  at  least  once  in  each 
year  a  properly  detailed  statement  of  its  income  and  expenditures 
for  such  preceding  period;  and  also  a  balance  sheet,  giving  a  de- 
tailed and  accurate  statement  of  the  condition  of  the  company  at 
the  close  of  its  last  fiscal  year  or  of  recent  date.  Applications  to  list 
additional  amounts  of  such  securities  must  give  like  additional  in- 
formation, together  with  a  statement  of  the  application  of  the  pro- 
ceeds of  securities  so  issued. 

10.  Applications  to  list  securities  of  all  other  companies  must  be 
accompanied  with  like  information  as  to  property,  financial  condi- 
tion, and  results  of  business,  as  indicated  above. 

11.  Every  application  for  listing  securities  must  be  accompanied 
by  a  check  for  the  amount  of  fifty  dollars  for  each  $1,000,000,  or 
portion  thereof,  of  the  par  value  of  each  class  of  security  presented 
for  listing.   Said  checks  should  be  drawn  to  the  order  of  the  "Treas- 
urer of  the  New  York  Stock  Exchange,"  and  will  immediately  be- 
come the  property  of  the  exchange. 

MOD.  Bus.  CORP.— 20 


306  MODERN   BUSINESS    CORPORATIONS. 

TRUSTEES  OF  MORTGAGES. 

12.  The  committee  recommends  that  a  trust  company  or  other 
corporation  should  be  appointed  trustee  of  each  mortgage  or  trust 
deed:  when  a  state  law  requires  the  appointment  of  a  local  individ- 
ual trustee,  then  a  trust  company  or  other  corporation  should  be 
appointed  as  co-trustee. 

13.  The  committee  will  not  approve  of  an  officer  of  an  applicant 
corporation  as  a  trustee  of  securities  issued  by  it,  nor  will  it  regard 
such  officer  or  director  as  being  qualified  to  give  opinion  as  counsel 
in  regard  to  any  legal  question  affecting  the  corporation. 

14.  In  all  cases  where  two  or  more  liens  have  been  placed  upon 
the  same  real  property  of  a  corporation,  seeking  the  listing  of  its 
securities  upon  the  exchange,  each  lien  must  be  represented  by  a 
trustee  or  trustees  entirely  separate  and  distinct  from  those  to  whom 
any  other  liens  upon  the  same  real  property,  either  in  part  or  in 
entirety,  have  been  entrusted. 

15.  The  trustee  must  present  to  the  committee  a  certificate  ac- 
knowledging the  acceptance  of  the  trust  and  giving  the  numbers 
and  amount  of  bonds  executed  in  accordance  with  the  terms  of  the 
mortgage;  in  case  the  trust  deeds  shall  require  the  deposit  of  col- 
lateral as  security  for  the  mortgage,  the  trustee  shall  certify  to  the 
deposit  of  such  collateral,  specifying  it  in  detail.    In  the  matter  of 
additional  issues  of  bonds  the  trustee  must  certify  that  such  in- 
crease has  been  made  in  conformity  with  the  terms  of  the  trust 
deed,  and  that  the  lien  of  the  mortgage  has  been  duly  recorded 
against  any  new  property  acquired,  or  that  the  required  additional 
collateral  has  been  duly  deposited. 

16.  It  is  requested  that  a  trustee  shall  furnish  opinion  of  counsel 
approximately  in  the  following  form: 

"We  have  examined  the  mortgage,  dated , ,  made  by 

the  Company  to  the   Trust  Company  of 

as  trustee,  to  secure  an  issue  of bonds  of  said 

company  to  an  amount  not  to  exceed  $ We  are  of  opinion  that 

the  actions  of  the  directors  and  stockholders  in  respect  to  this  mort- 
gage were  in  conformity  with  the  laws  of  the  state  of 

and  are  in  accordance  with  the  laws  of  all  states  in  which  the  prop- 
erty so  mortgaged  is  situated,  and  that  the  mortgage  and  bonds 
therein  referred  to  are,  in  all  respects,  valid  and  binding  obliga- 
tions of  said  eoinpanj  " 

EXGRAVED  CERTIFICATES  REQUIRED. 

17.  The  face  of  every  bond,  coupon,  or  certificate  of  stock  must 
be  printed  from  steel  plates,  which  have  been  engraved  in  the  best 


APPENDIX.  SOT 

manner,  and  which  have  such  varieties  of  work  as  will  afford  the 
greatest  security  against  counterfeiting. 

18.  For  each  document  or  instrument  there  must  be  at  least  two- 
steel  plates,  viz.:    A  Face  plate  containing  the  vignettes  and  letter- 
ing of  the  descriptive  or  promissory  portion  of  the  document,  which 
should  he  printed  in  black,  or  in  black  mixed  with  a  color;  also  a 
Tint  plate  from  which  should  be  made  a  printing  in  an  anti-photo- 
graphic color,  so  arranged  as  to  underlie  important  portions  of  the 
face  printing. 

19.  These  two  printings  must  be  so  made  upon  the  paper  that  the 
combined  effect  of  the  whole,  if  photographed,  would  be  a  confused 
mass  of  lines  and  forms,  and  so  give  as  effectual  security  as  possible 
against  counterfeiting  by  scientific  or  other  processes.   The  imprint, 
of  each  denomination  of  bonds  must  be  of  such  distinctive  appear- 
ance and  color  as  to  make  them  readily  distinguishable  from  other 
denominations  and  issues.   It  is  required  that  for  each  class  of  stock 
issued  there  shall  be  a  distinctively  engraved  plate  for  one  hundred 
shares  with  said  denomination  engraved  thereon  in  words  and  fig- 
ures; and  for  certificates  issued  for  smaller  amounts  than  one  hun- 
dred shares,  there  shall  be  similar  plates,  distinctive  in  design  or 
color,  for  each  issue,  and  there  shall  be  engraved  thereon  some  de- 
vice whereby  the  exact  denomination  of  the  certificate  may  be  dis-, 
tinctly  designated;  and  they  shall  also  have  conspicuously  engraved 
thereon  the  words,  "Certificate  for  less  than  one  hundred  shares." 

20.  It  is  required  that  a  sample  of  each  issue  of  stocks  or  bonds- 
sought  to  be  listed  shall  be  referred  to  the  committee  for  acceptance 
as  to  form,  character  and  workmanship  prior  to  application  for  their 
listing;  no  form  of  stock  certificate  or  bond  will  be  accepted  unless 
it  has  been  carefully  engraved  by  some  bank-note  engraving  com- 
pany whose  work  the  committee  on  stock  list  has  been  authorized, 
by  the  governing  committee  to  accept  for  admission  to  the  list. 

REGISTRATION. 

21.  The   constitution   of  the  exchange   provides   that  all   active 
stocks  must  be  registered  at  some  institution  satisfactory  to  the  com- 
mittee; each  application  must  be  accompanied  by  a  letter  from  the 
registrar  stating  the  amount  of  stock  registered  at  the  time  of  ap- 
plication. 

22.  The  exchange  requires  that  a  trust  company,  or  other  agency, 
shall  not  at  one  and  the  same  time  act  as  registrar  and  transfer 
agent  of  a  corporation.    The  duties  of  such  offices  should  be  per- 
formed by  different  companies  or  agencies. 

23.  In  any  case  of  increase  of  capital  stock,  except  for  converti- 
ble bonds  already  listed,  at  least  thirty  days'  notice  of  such  intended 


308  MODERN-  BUSINESS   CORPORATIONS. 

increase  must  be  given  in  writing  to  the  stock  exchange,  and  appli- 
cation must  be  made  through  the  committee  on  stock  list  to  the 
governing  committee  to  have  such  new  stock  admitted  to  the  list; 
the  registrar  will  not  be  authorized  to  register  any  new  stock  until 
notified  by  this  committee  that  such  stock  has  been  duly  listed. 

24.  All   signatures   upon   securities   must  be   written.     Stamped 
signatures  will  not  be  accepted  by  the  committee. 

CERTIFICATES    OF    STOCK. 

25.  The  power  of  attorney  indorsed  upon  a  certificate  of  stock 
must  contain  a  full  bill  of  sale,  must  be  irrevocable,  and  must  con- 
tain a  power  of  substitution. 

26.  After  a  stock  has  been  placed  on  the  list,  any  change  in  the 
form  of  certificates  or  place  of  registry  or  transfer  must  receive  the 
approval  of  the  committee  on  stock  list. 

All  alterations  or  amendments  proposed  to  be  made  to  bonds  or 
certificates  of  stock,  subsequent  to  the  original  issuance  thereof, 
must  be  submitted  to  the  committee  for  approval  as  to  form  and 
printing,  as  a  condition  precedent  to  listing. 

The  committee  will  not  favorably  consider  any  impress  which  has 
been  made  by  a  hand  stamp  upon  any  security. 

27.  The  governing  committee  may  refuse  to  make  new  issues  of 
stock  a  good  delivery,  or  allow  dealings  therein,  and  it  may  suspend 
dealings  in  the  capital  stock,  or  in  the  bonds  of  any  company,  either 
for  a  time  or  permanently,  as  the  case  may  seem  to  require. 

CERTIFICATES  OF  DEPOSIT  IN  TRUST. 

28.  Institutions,  firms  or  corporations  which  are  depositaries  of 
securities  under  plans  of  reorganization,  protective  or  associate  ac- 
tion, are  requested  to  accept  on  deposit  only  such  securities  as  are 
good  delivery  in  the  exchange;  provided,  however,  that  in  any  case 
where  said  depositaries  find  it  necessary  to  accept  securities  which 
are  not  a  good  delivery,  they  shall  issue  therefor  a  distinctive  cer- 
tificate which  will  indicate  such  fact.    Agreements  for  deposit  of 
securities  for  protective  or  associate  action  must  be  limited  to  a 
specified  time  for  continuance,  within  which  a  plan  of  reorganiza- 
tion or  adjustment  will  be  presented  to  the  certificate  holders  for 
acceptance,  or  in  default  thereof  such  holders  will  be  granted  oppor- 
tunity to  withdraw  the  securities  represented  by  their  certificates, 
and  their  assent  to  said  agreement  thus  terminated.   Penalty  for  de- 
lay in  depositing  securities  under  any  agreement  should  not  be  im- 
posed until  all  holders  of  such  securities  shall  have  had  reasonable 


APPENDIX.  309 

opportunity  for  so  depositing,  after  the  listing  of  the  depository 
certificates  upon  the  exchange. 

29.  When  bonds  are  deposited  with  institutions,  firms  or  corpora- 
tions, which  are  depositaries  under  plans  of  reorganization,  pro- 
tective or  associate  action,  certificates  therefor  will  be  considered  as 
representing  the  deposit  of  coupon  bonds.    When  certificates  are  is- 
sued for  deposit  of  registered  bonds,  said  certificates  must  bear  on 
their  face  evidence  of  such  fact.  Certificates  of  deposit  for  securities, 
whether  for  reorganization,  protective  or  associate  action  or  for  vot- 
ing trustees,  must  bear  the  countersignature  of  some  institution  as 
registrar,  in  same  manner  as  certificates  for  stock. 

RECOMMENDATIONS. 

30.  The  exchange  recommends  to  the  various  corporations  whose 
securities  are  here  dealt  in,  that  they  shall  print,  publish  and  dis- 
tribute to  stockholders,  at  least  fifteen  days  prior  to  annual  meet- 
ings, a  full  report  of  their  operations  during  the  preceding  fiscal 
year;  together  with  complete  and  detailed  statements  of  all  income 
and  expenditures,  and  a  balance  sheet  showing  their  financial  con- 
dition at  the  close  of  the  given  period.   The  exchange  requests  that 
stockholders  of  the  several  corporations  take  such  action  as  may 
be  necessary  for  the  accomplishment  of  this  recommendation. 

WILLIAM  H.  GRANBERY,  Chairman. 
WILLIAM  MCCLURE,  Secretary. 


RULES  PERTAINING  TO  THE  ADMISSION  OF  UNLISTED  SECURITIES. 

COMMITTEE  ON  UNLISTED  SECURITIES. 
In  re  Applications  for  Quotation  in  Unlisted  Department. 

State  name  of  corporation,  date  of  incorporation,  the  state  in 
which  it  is  incorporated,  if  personal  liability  attaches  to  ownership 
and  if  stock  is  full-paid. 

Authorized  capital. 

Preferred  stock — (Cumulative  or  non-cumulative %). 

State  nature  of  preference  of  preferred  over  common  stock  in  re- 
gard to  voting,  dividends  and  assets. 

Common  stock. 

Amount  of  each  outstanding. 

Par  value  of  shares,  preferred. 

Par  value  of  shares,  common. 

Transfer  agent,  New  York. 

Transfer  agent,  elsewhere. 


310  MODERN   BUSINESS   CORPORATIONS. 

Registrar,  New  York. 

Registrar,  elsewhere. 

State  if  certificates  issued  elsewhere  are  transferable  in  New  York 
•without  discharge. 

State  how  generally  stock  is  distributed,  about  number  of  stock- 
holders and  if  any  stock  is  in  the  hands  of  trustees  for  stockholders 
of  acquired  or  constituent  companies. 

Dividend  rates  and  dates  of  payment. 

Balance  sheet  last  issued,  if  of  recent  date. 

If  incorporation  is  of  a  recent  date,  a  statement  of  the  net  earn- 
ings of  the  acquired  or  constituent  companies  for  a  period  of  three 
years  must  be  made. 

Bonded  indebtedness: 
Give  particulars — Date  of  maturity.    Rate  of  interest.    Sinking 

fund  requirements. 
Amount  authorized. 
Amount  outstanding,  and  if  interest  has  all  been  paid. 

Bonded  indebtedness  of  acquired  or  constituent  companies  (with 
particulars  as  above). 

State  if  acquired  or  constituent  companies  are  owned  in  fee;  if 
not,  give  amounts  of  various  acquired  or  constituent  companies' 
stocks  owned,  also  amount  authorized. 

Give  history  of  corporation  (and  if  composed  of  old  companies 
name  them),  location  of  plants,  character  of  buildings,  acreage  and 
nature  of  business  conducted  at  each  plant. 

Board  of  directors,  give  address  (city  only).  Classified,  if  in 
classes. 

List  of  officers. 

Furnish  sample  of  each  kind  of  stock  certificates. 

Letter  accepting  transfer  agency  from  transfer  agent. 

Letter  from  registrar  accepting  office. 

Letter  from  counsel  in  re  legality  of  incorporation. 

Certified  copy  of  charter  or  articles  of  incorporation  and  by-laws. 

The  committee  will  require  that  the  articles  of  incorporation  or 
the  by-laws  provide  that  the  company  shall  not  deal  in  its  own  shares 
or  in  the  shares  of  constituent  or  acquired  companies,  and  that  an 
annual  report  to  stockholders  be  issued. 

Every  application  for  a  quotation  in  the  unlisted  department  lot 
securities  must  be  accompanied  by  a  check  for  the  amount  of  fifty 
dollars  for  each  $1,000,000,  or  portion  thereof,  of  the  par  value  of 
each  class  of  security.  Checks  should  be  drawn  to  the  order  of  the 
"Treasurer  of  the  New  York  Exchange,"  and  will  immediately  be- 
come the  property  of  the  exchange. 

Furnish  four  copies  of  application. 


BIBLIOGRAPHY  OF  SOME  USEFUL  BOOKS  ON"  COR- 
PORATION  LAW,  HISTORY,  MANAGEMENT,  ETC. 

AUTHORITIES  AND  TEXTS. 

Cook  on  Corporations. 
Morawetz  on  Corporations. 
Thompson  on  Corporations. 
Angell  and  Ames  on  Corporations. 
Kyd  on  Corporations. 
Taylor  on  Corporations. 
Elliott  on  Corporations. 
Clark  on  Corporations. 
Dill  on  New  Jersey  Corporations. 

CASES. 

Wilgus's  Corporation  Cases. 
American  and  English  Corporation  Cases. 

STATUTES. 

American  Corporation  Legal  Manual. 

(Digest  of  Statutes  and  Decisions.) 

Frost,  The  Incorporation  and  Organization  of  Corporations. 
(Discussion   of   Statutory  Provisions  and   Synopsis-Digest  of  Cor- 
poration Laws.) 
Overland,  Classified  Corporation  Laws. 

POPULAR  BOOKS   ON   ORGANIZATION   AND  MANAGEMENT. 

Conyngton,  Corporate  Organization  (1  Vol.),  and  Corporate  Man- 
agement (1  Vol.). 

(Excellent  books  for  lawyers  as  well  as  corporation  officers  and 
stockholders.  They  contain  the  most  extensive  discussions  of  pru- 
dential matters  of  corporate  concern.) 

Clephane  on  Business  Corporations. 

Spelling  on  Corporate  Management  and  By-Laws. 

Tompkins,  Summary  of  the  Law  of  Private  Corporations. 

311 


312  MODERN   BUSINESS   CORPORATIONS. 

HISTORICAL. 

Early  chapters  of  several  texts,  including  Elliott. 
Davis,  Corporations:    Their  Origin  and  Development 
(Academic,  up  to  modern  times,  but  nothing  modern.) 
Sohm's  Institutes  of  Roman  Law,  and  Savigny. 
(Accounts  of  Roman  Corporations.) 
S.  E.  Baldwin,  Modern  Political  Institutions. 
(General  Incorporation  in  Roman  and  English  Law.) 
Cranston  and  Keane,  Early  Chartered  Companies. 

ECONOMICS. 

Ripley,  ed.,  Trusts,  Pools  and  Corporations. 

Jenks,  The  Trust  Problem. 

Montague,  Trusts  of  To-day. 

Meade,  Trust  Finance.* 

Moody,  The  Truth  About  the  Trusts. 

Ely,  Monopolies. 

Collier,  The  Trusts. 

Symposium,  The  Trust:  Its  Book. 

GENERAL:   REFERENCE  TO  SPECIAL  CLASSES  OF  CORPORATIONS  OR  COR- 
PORATE BUSINESS. 

Johnson,  American  Railway  Transportation.* 

Hadley,  Railroad  Transportation. 

Cleveland,  Funds  and  Their  Uses.* 

Pratt,  The  Work  of  Wall  Street.* 

McVey,  Modern  Industrialism.* 

Moody,  The  Art  of  Wall  Street  Investing. 

Greene,  Corporation  Finance.    (An  unusually  excellent  book.) 

Wilgus,  The  United  States  Steel  Corporation. 

Tarbell,  History  of  the  Standard  Oil  Company. 

Montague,  Rise  and  Progress  of  the  Standard  Oil  Company. 

Dos  Passos,  Stockbrokers  and  Stock  Exchanges.     (Standard  law 
book  on  this  subject.) 

See  also  the  arguments  before  the  Industrial  Commission  at  Wash- 
ington, D.  C. 

SPECIMENS  OF  SECURITIES. 

Specimens  of  Investment  Securities,  compiled  by  W.  G.  Sumner, 
of  Yale,  published  by  the  C.  P.  Judd  Company,  New  Haven  Conn. 
(This  collection  was  compiled  for  class-room  use,  but  is  excellent 

*  Appleton's  Business  Series,  an  excellent  synopsis  of  modern  busi- 
ness practices. 


APPENDIX.  313 

for  attorneys.  It  contains  specimens  of  sixty-four  varieties  in  the 
form  of  securities,  each  general  type  being  given  in  full,  with  es- 
sentials of  variations  being  quoted  afterward.) 

CORPORATION  ACCOTJWTINQ. 

Keister's  Corporation  Accounting. 

Goodwin's  Manual. 

Hatfield,  Modern  Accounting.* 

Dicksee's  Auditing. 

(American  edition  of  English  work  on  professional  auditing.) 

STATISTICS  ON  CORPORATIONS. 

Manual  of  Statistics. 

Moody's  Manual  of  Railroads  and  Corporation  Securities. 
(Both  contain  up-to-date  financial,  statistical,  and  general  informa- 
tion concerning  individual  American  corporations  of  all  classes.) 

*In  Appleton's  Business  Series.     . 


314 


110DERX    BUSINESS    CORPORATIONS. 


CHARTS  SHOWING  POSSIBLE  DISTRIBUTION  OP 
OFFICERS,  ETC.,  AND  THEIR  RESPONSIBILITY 


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APPENDIX. 


315 


HOW  A  GREAT  ENGINEERING  COMPANY  DISTRIBUTES 
THE  MANAGEMENT  OF  ITS  BUSINESS 


Chart  of  responsibilities  of  officers  and  department  heads.    The  small  circles  out- 
side the  largest  circle  indicate  the  location  of  the  company's  contracts. 

—From  World's  Work. 


316 


MODERN   BUSINESS    CORPORATIONS. 


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INCOME-YIELDING  CAPACITY  OF  STOCKS 


,    0)  0) 
I*  tn  o 

DIVIDEND  RATE  PER  ANNUM. 

£|2 

1* 

2* 

3* 

4* 

5* 

6* 

7* 

8* 

9* 

10* 

12* 

10 

10.00 

20.00 

30.00 

40.00 

50.00 

60.00 

70.00 

80.00 

90.00 

100.00 

120.00 

12*4 

8.00 

16.00 

24.00 

32.00 

40.00 

48.00 

56.00 

64.00 

72.00 

80.00 

96.00 

15 

6.67 

13.33 

20.00 

26.67 

33.33 

40.00 

46.67 

53.33 

60.00 

66.67 

80.00 

17*4 

5.71 

11.43 

17.14 

22.86 

28.57 

84.28 

40.00 

45.71 

51.43 

57.14 

68.57 

20 

5.00 

10.00 

15.00 

20.00 

25.00 

30.00 

35.00 

40.00 

45.00 

50.00 

60.00 

221A 

4.44 

8.89 

13.33 

17.78 

22.22 

26.67 

31.11 

35.56 

40.00 

44.44 

53.33 

25 

4.00 

8.00 

12.00 

16.00 

20.00 

24.00 

28.00 

32.00 

36.00 

40.00 

48.00 

27*4 

3.64 

7.27 

10.91 

14.55 

18.18 

21.82 

25.45 

29.09 

32.73 

36.36 

43.64 

30 

3.33 

6.67 

10.00 

13.33 

16.67 

20.00 

23.33 

26.67 

30.00 

33.33 

40.00 

32*4 

3.08 

6.15 

9.23 

12.31 

15.39 

18.46 

21.54 

24.62 

27.69 

80.77 

36.92 

35 

2.86 

5.71 

8.57 

11.43 

14.29 

17.14 

20.00 

22.86 

25.71 

28.57 

34.29 

37  T-A 

2.67 

5.33 

8.00 

10.67 

13.33 

16.00 

18.67 

21.33 

24.00 

26.67 

32.00 

40 

2.50 

5.00 

7.50 

10.00 

12.50 

15.00 

17.50 

20.00 

22.50 

25.00 

80.00 

2.35 

4.70 

7.06 

9.41 

11.76 

14.12 

16.47 

18.82 

21.18 

23.53 

28.23 

45 

2.22 

4.44 

6.67 

8.89 

11.11 

13.33 

15.56 

17.78 

20.00 

22.22 

26.67 

2.11 

4.21 

6.32 

8.42 

10.53 

12.63 

14.74 

16.84 

18.95 

21.05 

25.26 

50 

2.00 

4.00 

6.00 

8.00 

10.00 

12.00 

14.00 

16.00 

18.00 

20.00 

24.00 

52*4 

1.90 

3.81 

5.71 

7.62 

9.52 

11.43 

13.83 

15.24 

17.14 

19.05 

22.86 

55 

1.82 

3.63 

5.45 

7.27 

9.09 

10.91 

12.72 

14.55 

16.36 

18.18 

21.82 

57  % 

.74 

3.48 

5.22 

6.96 

8.70 

10.43 

12.17 

13.91 

15.65 

17.39 

20.87 

60 

.67 

3.33 

5.00 

6.67 

8.33 

10.00 

11.67 

13.33 

15.00 

16.67 

20.00 

.60 

8.20 

4.80 

6.40 

8.00 

9.60 

11.20 

12.80 

14.40 

16  00 

19.20 

65 

.54 

3.08 

4.62 

6.15 

7.69 

9.23 

10.77 

12.31 

13.85 

15.38 

18.46 

67*4 

.48 

2.96 

4.44 

5.93 

7.41 

8.89 

10.37 

11.85 

13.33 

14.81 

17.78 

70 

.43 

2.86 

4.29 

5.71 

7.14 

8.57 

10.00 

11.43 

12.86 

14.29 

17.14 

72*4 

.38 

2.76 

4.14 

5.52 

6.90 

8.27 

9.65 

11.03 

12.41 

13.79 

16.55 

75 

.33 

2.67 

4.00 

5.33 

6.67 

8.00 

9.33 

10.67 

12.00 

13.33 

16.00 

77  & 

.29 

2.58 

3.87 

5.16 

6.45 

7.74 

9.03 

10.32 

11.61 

12.90 

15.48 

80  2 

.25 

2.50 

3.75 

5.00 

6.25 

7.50 

8.75 

10.00 

11.25 

12.50 

15.00 

82^ 

.21 

2.42 

3.64 

4.85 

6.06 

7.27 

8.48 

9.70 

10.91 

12.12 

14.54 

85 

.18 

2.35 

3.53 

4.71 

5.88 

7.06 

8.24 

9.41 

10.59 

11.76 

14.12 

87^ 

.14 

2.29 

3.43 

4.57 

5.71 

6.86 

8.00 

9.14 

10.29 

11.43 

13.71 

W 

.11 

2.22 

3.33 

4.44 

5.56 

6.67 

7.73 

8.89 

10.00 

11.11 

13.33 

.08 

2.16 

3.24 

4.32 

5.41 

6.49 

7.57 

8.65 

9.73 

10.81 

12.97 

95  * 

.05 

2.11 

3.16 

4.21 

5.26 

6.32 

7.37 

8.42 

9.47 

10.53 

12.63 

97*4 

.03 

2.05 

3.08 

4.10. 

5.13 

6.15 

7.18 

8.21 

9.23 

10.26 

12.31 

100 

.00 

2.00 

3.00 

4.00 

5.00 

6.00 

7.00 

8.00 

9.00 

10.00 

12.00 

105 

.95 

.90 

2.86 

3.81 

.76 

5.71 

6.67 

7.62 

8.57 

9.52 

11.43 

110 

.91 

.82 

2.73 

3.64 

.55 

5.45 

6.36 

7.27 

8.18 

9.09 

10.91 

115 

.87 

.74 

2.61 

3.48 

.35 

5.22 

6.09 

6.96 

7.83 

8.70 

10.43 

120 

.83 

.67 

2.50 

3.33 

.17 

5.00 

5.83 

6.67 

7.50 

8.33 

10.00 

125 

.80 

.60 

2.40 

3.20 

.00 

4.80 

5.60 

6.40 

7.20 

8.00 

9.60 

130 

77 

.54 

2.31 

3.08 

3.85 

.62 

5.38 

6.15 

6.92 

7.69 

9  23 

135 

.74 

.48 

2.22 

2.96 

3.70 

.44 

5.19 

5.93 

6.67 

7.41 

8.89 

140 

.71 

.43 

2.14 

2.86 

3.57 

.29 

5.00 

5.71 

6.43 

7.14 

8.57 

145 

.69 

.38 

2.07 

2.76 

3.45 

.14 

4.83 

5.52 

6.21 

6.90 

8.28 

150 

.67 

.33 

2.00 

2.67 

3.33 

.00 

4.67 

5.33 

6.00 

6.67 

8.00 

155 

.65 

.29 

.94 

2.58 

3.23 

8.87 

4.52 

5.16 

5.81 

6.45 

7.74 

160 

.63 

.25 

.87 

2.50 

8.12 

3.75 

4.87 

5.00 

5.62 

6.25 

7.50 

165 

.61 

.21 

.82 

2.42 

3.03 

3.64 

4.24 

.85 

5.45 

6.06 

7.27 

170 

.59 

.18 

.76 

2.35 

2.94 

3.53 

4.12 

.71 

5.29 

5.88 

7.06 

175 

.57 

.14 

.71 

2.29 

2.86 

3.43 

4.00 

.57 

5.14 

5.71 

6.85 

180 

.56 

.11 

.67 

2.22 

2.78 

3.33 

3.89 

.44 

5.00 

5.56 

6.67 

185 

.54 

.08 

.62 

2  16 

2.70 

3.24 

8.78 

.32 

4.86 

5.41 

6.49 

190 

.53 

.05 

.58 

2.11 

2.63 

3.16 

3.68 

.21 

4.74 

5.26 

6.32 

195 

.51 

.03 

.54 

2.05 

2.56 

3.08 

3.59 

.10 

4.62 

5.13 

6.15 

200 

.50 

.00 

.50 

2.00 

2.50 

3.00 

3.50 

.00 

4.50 

5.00 

6.00 

KEY— A  six  per  cent,  stock  which  sells  at  85  yields  7.06  per  cent.    Look  down  the 
6  per  cent,  column  till  opposite  85. 


APPENDIX.  321 

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328  MODERN   BUSINESS    CORPORATIONS. 

NOTE. — The  formula  used  by  Mr.  Montgomery  Rollins,  of  Boston,  to 
give  the  market  value  of  a  bond  paying  interest  semi-annually  is  as 
follows,  i  representing  one-half  of  the  interest  at  bond  rate: 


H 


r|-ioo 


(1  +  r)< 


Another  formula,  prepared  by  Mr.  William  R.  Blair,  of  Oshkosh, 
Wisconsin,  is  this: 

Let  n  equal  the  number  of  interest  payments  the  bond  promises, 
r  the  real  or  market  rate  of  interest,  and  d  the  difference  between 
a  single  interest  payment  of  the  bond  and  the  interest  on  its  face 
value  at  market  rate.  This  difference,  recurring  periodically,  be- 
comes an  annuity  of  which  the  present  worth  is 

d  [  (1  +  r)  _  l] 
(l  +  r)nr 

The  numerical  value  of  this  quantity  may  be  found  by  the  use  of 
logarithms,  and  is  the  premium  of  the  bond  when  the  bond  rate  ex- 
ceeds the  market  rate,  or  the  discount  when  the  bond  rate  is  less 
than  the  market  rate.  "Bond  Values,"  published  by  Montgomery 
Rollins  &  Co.,  Boston,  contains  extensive  tables  showing  the  net 
return  from  bonds,  stocks  and  other  investments,  at  various  ma- 
turities, interest  or  dividend  returns,  and  prices. 


^B^AHp 

V     OF  THE 

UNIVERSITY 

OF 


(^ 


iitf> 
+ 


frt'-.r 

(  i 


INDEX. 

[References   are   to   pages.] 

A 
ABANDONMENT, 

dissolution  by  abandoning  corporate  purpose,  186. 

ACCOUNTANT, 

bookkeeping,  duties  connected  with,  145-152. 
explanation  of  difficult  questions  presented,  150-168. 
licensed  by  state,  146. 
statement  interpreted  by,  157-167. 

AGENCY, 

promoter  does  not  represent  corporation,  20. 
promoter's  authority  from  incorporators,  20. 

AGENT, 

appointment  and  removal  by  directors,  96. 

de  facto  powers  of  acting  agent,  98. 

doing  business  without  establishing  agency,  28-31. 

proxy  at  stockholders'  meeting,  138. 

resident  agent  required  when,  27. 

AMENDMENTS, 

acceptance  by  unanimous  vote  of  stockholders,  79. 
charter  and  articles,  79-81. 
meeting  for  consideration  of,  81. 

AMERICAN  BANKERS'  ASSOCIATION, 

standard  form  of  corporate  statement,  264. 

ANNUAL  MEETING, 

stockholders'  meetings,  136-139. 

ARIZONA, 

advantages  and  disadvantages  of  corporation  laws,  23. 

329 


330  INDEX. 

{References   are   to   pages.] 
ARTICLES  OF  ASSOCIATION, 
amendment,  79-81. 
by-laws,  effect  upon  articles,  83. 
consolidation  involves  filing  of,  188. 
definition  and  purpose,  75,  76. 
directors  named  by,  96. 
dividend  payments  controlled  by,  65. 
filing  begins  existence  of  corporation,  82. 
Indiana  form,  205. 

irregularities  defeating  incorporation,  82. 
of  United  States  Steel  Corporation,  copy,  207. 
purpose  of  corporation,  statement,  76,  199. 
reorganization  to  change,  188. 
under  New   Jersey  act  for   "associations  not   for  pecuniary 

profit,"  form,  204. 
under  New  York  law,  form,  203. 

ASSESSMENTS, 

definition  and  effects,  70,  71. 
reorganization  to  meet  necessity  for,  189. 

ASSIGNMENT, 

entering  in  books  of  company,  172-176. 

ASSIGNMENT  AND  TRANSFER, 
form  on  certificate,  233. 

ATTORNEY, 

See  COUNSEL. 
proxy  at  stockholders'  meetings,  138. 

AUDITING, 

explanation  of  questions  presented,  150-168. 

AUDITOR, 

bookkeeping,  duties  connected  with,  144,  152. 
duties  to  stockholders,  147,  148. 
powers  and  duties,  105. 

B 
BALLOT, 

election  of  directors,  137,  138. 

BANK, 

See  FINANCIAL  BANKING;   COMMERCIAL  BANKING. 
capital  increased  by  borrowing  from,  34. 
commercial  distinguished  from  financial  banking,  50. 


INDEX.  331 

[References  are  to  pages.] 


BANK — Continued. 

congress  charters  national  banks,  3. 

law  governing  corporations,  2. 

statement  by  corporation  to  obtain  loan,  166. 

underwriting  corporation  securities,  46. 

BANKERS, 

fiscal  agents  in  placing  stocks  and  bonds,  45. 

BENEVOLENT  ASSOCIATIONS, 

classification  of  corporations,  2. 

BETTERMENTS, 

bookkeeping  charges  for,  154. 

BIBLIOGRAPHY, 

books  of  corporate  concern,  311. 

BILLS  AND  NOTES, 

indorsement  by  treasurer,  103. 
president  executes  when,  100. 

BONDHOLDERS, 

voting  at  stockholders'  meetings,  137. 

BONDS, 

assignment  and  indorsement,  125. 
assumed  bonds  defined,  127. 
blanket  mortgage  bonds  defined,  126. 
capital  obtained  by  issue  of,  39-44. 
car  trust  bonds  defined,  127. 
classification  and  nature,  125-130. 
collateral  trust  bonds  defined,  126. 
contract  determines  value,  128. 
conversion  of  stock  into  bonds,  117. 
convertible  bonds  defined,  130. 
coupon  bonds  defined,  129. 
debenture  bonds  defined,  127. 
definition  and  description,  39-44. 
directors  may  issue,  95. 
divisional  bonds  defined,  126. 
effect  of  issue  on  value  of  stock,  41. 
element  in  capital  of  company,  33-39. 
equipment  bonds  defined,  126. 
first  mortgage  gold,  form,  233. 
gold  bonds  defined,  129. 
holders  allowed  to  vote  when,  26. 


INDEX. 

[References   are   to   pages.] 

BONDS — Continued. 

holders  are  creditors  of  corporation,  40,  43. 

income  bonds  defined,  127. 

income  gold,  form,  237. 

indemnity,  for  reissue  of  lost  stock  certificate,  form,  252. 

interest  coupons  matured  before  issue  of  bonds,  64. 

interest  distinguished  from  dividends  on  stock,  42. 

interest-yielding  capacity  of,  321,  328. 

joint  bonds  defined,  128. 

legal  tender  bonds  defined,  129. 

listing  in  stock  exchange,  59. 

mortgage  bonds,  126. 

mortgage,  origin  of,  283. 

participating  bond  defined,  128. 

placing  by  promoters  and  agents,  45,  49. 

price  with  reference  to  time  of  issue,  62-65. 

prior  lien  bonds  defined,  128. 

procedure  for  issuing,  form,  250. 

purchased  by  stockholders,  41. 

redeemable  bonds  defined,  130. 

refunding  bonds  defined,  128. 

registered  bonds  defined,  129. 

security  for  payment  of,  125. 

sinking  fund  for  redemption,  43. 

sinking  fund,  form,  235. 

stock  distinguished  from,  40,  41. 

underlying  bonds  defined,  128. 

value  determined  by  stock  exchange,  61,  62. 

BONUS, 

promoter  cannot  receive,  18. 

shares  issued  without  full  consideration,  111,  112. 

BOOKKEEPING, 

accountant  distinguished  from  clerk,  143. 
accountant,  rank  and  qualification,  145-152. 
auditor's  rank  and  qualifications,  144-152. 
bookkeeper's  qualifications  and  duties,  144. 
books  of  corporation,  167-182. 
depreciation  and  renewals,  152,  153. 
improvements,  costs  charged  how,  154. 
questions  presented  in  auditing,  150-168. 
railroad  improvements,  how  charged,  153-156. 
statement  interpreted  by  accountant,  157-167, 


INDEX.  333 

[References   are   to   pages.] 
BOOKS, 

See  BOOKKEEPING. 
corporation  calendar,  179-181. 
dividend  book,  176. 

foreign  corporation,  law  concerning,  182. 
instalment  and  instalment  scrip  books,  178,  179. 
keeping  in  home  state,  28. 
list  of  books  required,  167,  168. 
minute  book,  168-171. 
secretary  keeps,  102. 

statutes  requiring  certain  kinds,  181,  182. 
stock  certificate  book,  172-174. 
stockholders'  ledger,  171, 172. 
stockholders  may  examine,  133. 
subscription  book,  176-178. 
transfer  book,  174-176. 
treasurer's  duty  to  keep,  103. 

BROKERS, 

fiscal  agents  in  placing  stocks  and  bonds,  45. 
note,  sale  of  commercial  paper  by,  267. 

BUILDING  ASSOCIATIONS, 

law  governing  corporations,  2. 

BUSINESS, 

changing  to  corporation,  65-67. 

what  constitutes  doing  business  by  foreign  corporation,  28-31. 

BUSINESS  CORPORATION, 

capital  stock  necessary,  110. 
classification  of,  2. 

BY-LAWS, 

amendment,  85,  86. 

definition  and  effect,  82-86. 

directors  adopt  when,  84. 

directors'  meeting  should  be  provided  for,  98. 

forfeiture  of  stock  pursuant  to,  86. 

individual  liability  resulting  from  violation,  86. 

manager's  powers  and  duties  declared  by,  104. 

penalties  for  violation,  86. 

powers  and  duties  of  committees,  105. 

powers  of  officers  and  directors  declared,  77. 

presumption  that  members  assented  to,  84. 

rules  of  order  declared  by,  87. 


334  INDEX. 

[References  are  to  pages.] 

BY-LAWS— Continued. 
simple  form,  213. 

special  meetings  of  directors  provided  for,  99. 
special  stockholders'  meeting  provided  for,  139. 
treasurer's  powers  and  duties  declared  by,  103. 
United  States  Steel  Corporation,  copy,  217. 


CALLS, 

definition,  71. 

CALENDAR, 

character  and  contents,  179-181. 

CANCELLATION, 

certificates  pasted  in  book,  173. 

CAPITAL, 

distinguished  from  stock,  109. 

profits  and  gains  are  part  of,  until  distributed,  110. 

CAPITALIZATION, 

bonds  as  an  element  of,  39-44. 

definition,  31,  32. 

determining  amount  of,  32-39. 

earning  value  as  element  of,  36. 

fees  and  taxes  reduced  by  low  capitalization,  44. 

loans  as  an  aid  to,  33. 

over-capitalization  and  under-capitalization  defined,  37. 

value  of  property  not  equaled  by,  44. 

CAPITAL  STOCK, 

See  STOCK. 

CERTIFICATE  OF  ELECTION, 
inspectors',  form,  248. 

CERTIFICATES  OF  STOCK, 

See  STOCK  CERTIFICATES. 
common  form,  229. 
common  form,  containing  notice  and  terms  of  preferred  issue,. 

230. 

founders'  shares,  form,  232. 
preferred  issue,  230. 
standard  oil  form,  232. 


INDEX.  335 

[References   are   to   pages.] 
CHANGE  OP  NAME, 

manner  of  effecting,  80,  81. 

CHARTER, 

See  FORMATION. 
advantages  and  disadvantages  of  different  corporation  laws, 

23-27. 

advantages  of  incorporation,  5. 
amendment,  79-81. 
congress  has  power  to  issue,  3. 
consolidation  by  taking  out  new  charter,  187. 
corporation  created  by,  1. 
definition  and  purpose,  75,  76. 
dissolution  on  expiration  or  revocation  of,  185. 
forfeiture  by  non-user,  82. 
general  rules  provided  by,  77. 
incorporation  in  more  than  one  state,  3. 
renewal  effected  how,  190. 
repeal  by  states,  79. 
special  acts  of  incorporation,  4. 
where  to  incorporate,  22. 

CHARTS, 

organization,  314,  315. 

CHECKS, 

indorsement  by  treasurer,  103. 
president  executes  when,  101. 

CITIZEN, 

corporation  is,  1. 

CLERK, 

distinguished  from  accountant,  143. 

COLLATERAL, 

stock  used  as  security,  6. 

COMITY, 

foreign  corporation  recognized  when,  28-31. 

COMMERCIAL  BANKING, 
function  of,  34,  50. 

COMMERCIAL  CORPORATIONS, 

See  BUSINESS  CORPORATIONS. 


336  INDEX. 

[References   are   to   pages.] 

COMMERCIAL  EVIDENCES   OF  CORPORATE  EXISTENCE, 
origin  of,  283. 

COMMERCIAL  PAPER, 

sale  of  through  brokers,  267. 

COMMITTEES, 

powers  and  duties,  105,  106. 

COMMISSIONS, 

placing  stocks  and  bonds,  45. 

promoter  cannot  make  secret  profit,  18. 

sale  of  stocks  and  bonds  through  bankers,  48. 

COMMON  STOCK, 

bonds  of  corporation  compared  with,  40,  41. 
certificate  and  stub,  form,  229,  230. 

FRANCHISE  TAX, 

statutes  for  organizing  corporations,  23-27. 

FRAUD, 

aiding  and  abetting  fraud  of  promoter,  22. 
auditor's  duty  in  discovering,  147-149. 
directors  personally  liable  when,  95. 
promoter  selling  to  corporation,  18. 

registrar's   liability   for   attesting   or   countersigning   certifi- 
cates, 122. 

GENERAL  MANAGER, 

See  MANAGEB. 

GOOD  WILL, 

advantages  of  incorporation,  7. 
incorporation  of  established  business,  67. 

GUARANTEED  STOCK, 
definition,  113. 

dividends  payable  from  surplus  earnings,  63. 
voting  at  stockholders'  meetings,  137. 

COMPANY, 

corporation  defined,  1. 

COMPETITION, 

capitalization  below  value  to  prevent,  44. 
unintelligent,  289. 

CONGRESS, 

charters,  may  grant,  3. 


INDEX.  337 

[References   are   to  pages.] 
CONNECTICUT, 

advantages  and  disadvantages  of  corporation  laws,  23. 

CONSOLIDATED  CORPORATIONS, 

listing  of  securities  in  stock  exchange,  60. 
organization  of  trusts,  50,  59. 

CONSOLIDATION, 

law  concerning,  187-189. 
resolution  of,  form,  253. 

CONTRACTS, 

consolidated  corporation  liable  on,  187. 
dissolution  of  corporation  does  not  release,  187. 
president  executes  when,  101. 
promoter's,  form,  193. 
promoter  may  bind  corporation  when,  21. 
re-organization  of  corporation,  liability  upon,  189. 
secretary's  power  to  make,  102. 
ultra  vires,  effect  of,  78. 

CONVERTIBLE  STOCK, 
definition,  117. 

CONVEYANCE, 

inherent  power  of  corporation,  77. 

CONVICTION, 

removal  of  director  guilty  of  felony,  94. 

CORPORATE  WEALTH, 
distribution  of,  281. 

CORPORATION, 

See  CHARTERS. 

advantages  of  incorporation,  5. 
beginning  of  existence,  82. 

bookkeeping,  auditing,  and  accounting,  143-182. 
chartered  by  more  than  one  state,  3. 
classification  of,  2. 

definition,  advantages,  and  legal  status,  1-9. 
distinguished  from  joint  stock  company,  4. 
formation  and  organization,  13-71. 
irregularities  defeating  incorporation,  82. 
magnitude  of,  278. 
theories  of  duty  of  state,  7. 
where  to  incorporate,  22. 

MOD.  Bus.  CORP.— 22 


338  INDEX. 

[References   are   to   pages.] 
CORPORATION  CALENDAR, 

character  and  contents,  179,  181. 

COUNSEL, 

powers  and  duties  of,  104,  105. 

COUPONS, 

definition  with  relation  to  bonds,  129. 

COURTS, 

advantages  of  foreign  corporations  in,  299. 
CREDITORS, 

duty  of  state  to  protect  corporation  creditors,  8. 

CREDIT, 

capital  increased  by  use  of,  33-34. 

corporate,  262. 

statement  by  corporation  to  obtain,  166. 

CUMULATIVE  VOTING, 

stockholders'  meetings,  138. 


DEBENTURE, 

bonds  of  corporation,  127. 

DEBT, 

bonds  of  corporation  constitute,  40-44. 

consolidated  corporation  liable  for,  187. 

directors  may  incur,  94. 

re-organization,  liability  of  corporation  created  by,  189. 

stockholder's  liability  for,  134. 

DEEDS, 

president  executes  when,  101. 

DE  FACTO  OFFICER, 

permitting  action  by  unauthorized  person,  effect,  98. 

DEFERRED  STOCK, 
definition,  117. 

DEFINITIONS, 

bonds  of  corporation  defined  and  described,  39-44. 
by-laws  defined  and  described,  82-86. 
capitalization  defined,  31,  32. 
common  stock  defined,  113. 
convertible  stock  defined,  117. 


INDEX.  339 

[References   are   to  pages.] 
DEFINITIONS— Continued, 
corporation  defined,  1. 
deferred  stock  defined,  117. 
founder's  shares  defined,  117. 
guaranteed  stock  defined,  116. 
outstanding  stock  defined,  118. 
over-issued  stock  defined,  119. 
preferred  stock  defined,  113,  116. 
promoter  defined,  15. 
securities  defined,  50. 
special  stock  defined,  117. 
treasury  stock  defined,  119. 
underwriting  of  stocks  and  bonds,  46. 
unissued  stock  defined,  118. 

DELAWARE, 

advantages  and  disadvantages  of  corporation  laws,  24. 

DEPRECIATION, 

charged  for  in  corporate  bookkeeping,  152. 

DIRECTORS, 

See  OFFICERS. 
agents  appointed  by,  96. 
agent  for  corporation,  92. 
articles  of  association  naming,  96. 
auditing  books  of  officers,  105. 
auditor's  duty  to  influence  action,  147,  148. 
business  of  corporation  transacted  by,  94. 
by-laws  adopted  by,  84. 

by-laws  violated  may  result  in  personal  liability,  86. 
classification  as  to  term,  92. 
consolidation,  agreement  for,  188. 
cumulative  voting  for  election  of,  26. 
de  facto  powers  of  acting  director,  98. 
discretion  as  to  books  kept,  168,  181. 
election  by  ballot,  137,  138. 
election  by  the  stockholders,  96. 
incorporation  of  established  business,  66. 
liability  for  acts  of  officers,  95. 
liability  for  torts  of  corporation,  95. 
liability  for  ultra  vires  acts,  95. 
meetings,  duties  of  secretary,  102. 

meetings,  time,  place  and  manner  of  conducting,  98,  99. 
minority  representation,  138. 


340  INDEX. 

[References   are   to   pages.] 

DIRECTORS — Continued. 

notice  of  election,  form,  249. 

notice  of  meeting,  98. 

number  and  selection  of,  91-98. 

officers,  election  and  removal  of,  96. 

order  of  business  at  meetings,  99. 

powers  of,  92-98. 

president  presides  at  meetings  of,  100. 

promoter  forming  corporation,  duty,  17. 

qualifications  of,  91,  92. 

ratification  of  acts  on  behalf  of  corporation,  95. 

removal  from  office,  93. 

re-organization,  procedure,  190. 

resident  director  of  corporation,  27. 

statutes  as  to  holding  meetings,  23-27. 

stockholders,  must  be,  92. 

DIRECTORS'  REGULAR  MEETING, 

amendment  of  charter  or  articles,  81. 

calendar  recording  date  of,  179-181. 

certificate  of  officers,  169. 

minute  book  should  record,  168,  169. 

minutes  corrected  and  approved,  170. 

notice  of,  form,  249. 

objections  entered  in  minutes,  170. 

waiver  of  notice,  form,  250. 

DIRECTORS'  SPECIAL  MEETING, 
notice  of,  form,  249. 

DISCRETION, 

dividends  on  preferred  stock  refused  when,  115. 

DISSOLUTION, 

corporation  may  dissolve  by  action  of  stockholders,  77. 

directors  may  not  order,  95. 

law  concerning,  185-187. 

preferred  stockholder's  rights,  114. 

reorganization  as  new  corporation,  80. 

stockholders  may  consent  to,  186. 

stockholder's  share  assets,  133. 

DISTRICT  OP  COLUMBIA, 

advantages  and  disadvantages  of  corporation  laws,  24. 


INDEX.  341 

[References  arc   to   pages.} 
DIVIDENDS, 

calendar  recording  date  for  payment,  179-181. 
credits  to  account  of,  152. 
cumulative  dividends  paid  when,  115. 
discretion  as  to  payment  on  preferred  stock,  115. 
distinguished  from  interest,  42. 
distributive  share  of  surplus  earnings,  63. 
notice  of,  form,  250. 
payment  as  affecting  price  of  stock,  41. 
payment  upon  issue  of  stock,  63. 
preferred  stockholder's  rights,  113,  114. 
price  of  stock  with  reference  to  payment  of,  62-65. 
sentence    granting   pro    rata   dividends    to    preferred    stock, 
form,  232. 

DIVIDEND  BOOK, 

character  and  contents,  176. 

DOMESTIC  CORPORATION, 
non-residence  of,  27-28. 

DRAFTS, 

president  executes  when,  101. 


E 
EARNINGS, 

capitalization  fixed  on  basis  of,  34-35. 
dividends  payable  to  stockholders,  63. 

ELECTION, 

stockholders'  meetings,  137,  138. 

EMPLOYES, 

stockholder's  liability  to,  134. 

essentials  of  instrument,  forms,  199  et  seq. 

ESTOPPEL, 

assignment  in  blank,  effect  of,  124,  125. 

preferred  shares  reciting  conditions  estopped  the  holder,  116. 

ultra  vires  defense  excluded  when,  78. 

EXPENSES, 

depreciation  and  renewals  distinguished  from,  153. 
railroads,  bookkeeping  charges  for,  153-156. 

EXPERTS, 

bookkeeping  and  accounting,  144-152. 


INDEX. 
[References   are   to   pages.] 


FEDERAL  COURTS, 

corporations  of  district  of  Columbia  cannot  sue  in,  24. 

FEES, 

consolidation,  filing  articles  of,  188. 
foreign  corporation  required  to  pay,  30-31. 

FELONY, 

removal  of  director  upon  conviction,  93,  94. 

FIDUCIARY, 

promoter's  relation  to  corporation,  17. 

FINANCE, 

auditing  and  accounting,  150-168. 

FINANCIAL  BANKING, 

explanation  of  purpose  and  methods,  50,  59. 

FINANCIAL  CORPORATION, 

law  governing  in  foreign  state,  2. 

FOREIGN  CORPORATIONS, 

advantages  in  courts,  299. 

books  required  by  law,  182. 

consolidation  of  domestic  corporation  with,  187. 

control  by  state  where  corporation  was  created,  27. 

doing  business,  what  constitutes,  28-31. 

law  governing,  2. 

pre-requisites  to  doing  business,  28-31. 

relation  to  state,  28-31. 

FORFEITURE, 

by-laws,  effect  on  right  of,  86. 
charter  forfeited  by  non-user,  82. 
dissolution  by  forfeiting  charter,  185. 
subscription  to  stock  forfeited  when,  69,  70. 
ultra  vires  act  as  cause  for,  78. 

FORMATION, 

See  CHARTER. 

advantages  and  disadvantages  of  different  jurisdictions,  23-27. 
beginning  of  existence  of  corporation,  82. 
charter  necessary,  75. 

control  over  domestic  corporation  with  principal  office  in  an- 
other state,  27. 


INDEX.  343 

[References  are   to   pages.] 
FORMATION— Continued. 

filing  articles  of  association,  effect,  75,  76. 
fortuitous  association  of  individuals,  14. 
manner  of  effecting  corporate  formation,  14-22. 
partnership    or    individual     business    changed    to    corpora- 
tion, 65-67. 

placing  stocks  and  bonds,  45-49. 
promoters  forming  corporations,  15-22. 
promoter's  liability  upon  failure  to  organize,  19. 
purposes  for  which  a  corporation  is  formed,  76. 
valuation  of  property  exchanged  for  stock,  68,  69. 
where  to  incorporate,  22. 
who  may  incorporate,  14. 

FORMULAE, 

for  determining  bond  values,  328. 

FOUNDER'S  SHARES, 
definition,  117. 
form  of  certificate,  232. 

FRANCHISE, 

See  PUBLIC  UTILITY  CORPORATIONS. 
element  of  corporation  capital,  36. 
definition,  116. 

H 
HOLDING  COMPANIES,  258. 

HOLIDAYS, 

calendar  recording  date  of,  179-181. 


IMPROVEMENTS, 

bookkeeping  charges  for,  154. 

INCOME, 

questions  presented  in  auditing,  151-168. 

INCORPORATION, 

See  FORMATION. 
advantages  of,  5. 
fees,  tables  of,  316,  317. 
in  several  states,  3. 
special  acts  of,  4. 


344  INDEX. 

[References   are   to   pages.] 
INCREASE  OF  CAPITAL  STOCK, 
directors  may  not  order,  95. 

INDEMNITY  BOND, 
form,  252. 

INDIVIDUAL  LIABILITY, 

by-laws  violated  may  result  in,  86. 

INDORSEMENT, 

president's  power  of,  101. 
treasurer's  power  of,  103. 

INDUSTRIAL  CORPORATIONS, 

See  BUSINESS  CORPORATIONS. 

INHERENT  POWERS, 

See  POWERS. 

INSANE, 

stock,  subscriptions  and  ownership,  14. 

INSOLVENCY, 

duty  of  state  to  protect  corporation  creditors,  8. 
re-organization  of  insolvent  corporation,  189. 
stockholders'  rights  in  case  of,  133. 

INSPECTORS  OP  ELECTION, 
certificate  of,  form,  248. 
oath  of,  form,  248. 

INSURANCE, 

law  governing  corporations,  2. 

INSTALLMENT  BOOKS, 

character  and  contents,  178,  179. 

INVESTMENTS, 

bonds  and  stock,  275. 

formation  of  corporation  by  individuals,  14. 

INTEREST, 

bond  holder's  right  determined  how,  64. 


JOINT  STOCK  COMPANY, 
defined,  4. 

differs  from  corporation,  4. 
statutory  authority  for,  4. 


INDEX.  345 

{References  are  to  pages.] 

L 

LAWS, 

corporation  governed  by  what,  2. 

LAWYER, 

the  corporation,  272. 

LEASE, 

directors  may  not  execute,  95. 

LIENS, 

bonds  secured  by,  125. 

LIMITED  LIABILITY, 

advantages  from  incorporation,  B. 

LISTED  SECURITIES, 

rules  of  admission,  New  York  stock  exchange,  303. 

LOANS, 

directors  may  negotiate,  94. 

necessity  as  an  aid  to  capitalization,  33. 

statement  by  corporation  to  obtain,  166. 

LOOSE  LEAP  RECORDS, 

minutes  of  meetings  kept  by,  169. 

LOST  SHARES, 

replacing  by  new  certificate,  124. 

M 
MACHINERY, 

depreciation,  how  charged  in  bookkeepng,  152. 

MAJORITY, 

quorum  at  stockholders'  meeting,  135. 

MAIL, 

notice  of  stockholders'  meetings,  136. 

M3AINE, 

advantages  and  disadvantages  of  corporation  laws,  24. 

MANAGER, 

powers  and  duties  of,  104. 
MARKETING  PROMISSORY  NOTES,  267. 

MARRIED  WOMAN, 

corporations,  may  form,  14. 


346  INDEX. 

[References   are   to   pages.] 
MASSACHUSETTS, 

advantages  and  disadvantages  of  corporation  laws,  24, 

MEETINGS, 

See  STOCKHOLDERS'  MEETINGS. 

MINING, 

advantages  of  incorporation,  5. 

MINORITY, 

privileges  at  stockholders'  meetings,  138. 

MINORS, 

subscriptions  to  corporation  stock,  14. 

MINUTE  BOOK, 

character  and  contents,  168-171. 
correction  and  approval  of  minutes,  170. 

MINUTES, 

secretary  keeps,  102. 

MORTGAGE, 

bonds  of  corporation  secured  by,  39-44. 
bonds  secured  by,  126. 
directors  may  execute,  94. 
trust  companies  as  trustee,  60. 

MOTIONS, 

minutes  of  introduction  and  passage  of,  169. 

N 
NAME, 

See  CHANGE  OF  NAME. 
corporation  names,  67. 

NATIONAL  CORPORATIONS, 
congress  may  charter,  3. 

NEGLIGENCE, 

loss  or  theft  of  shares  of  stock,  124,  125. 

NEGOTIABLE  INSTRUMENTS, 

stock  certificates  are  not,  124. 

NET  EARNINGS, 

See  PROFITS. 

NEVADA, 

advantages  and  disadvantages  of  corporation  laws,  24. 


INDEX.  347 

[References   are   to   pages.} 
NEW  JERSEY, 

advantages  and  disadvantages  of  corporation  laws,  25. 

NEW  MEXICO, 

advantages  and  disadvantages  of  corporation  laws,  26. 

NEW  YORK, 

advantages  and  disadvantages  of  corporation  laws,  25. 

NON-RESIDENT, 

domestic  corporations  as  non-residents,  27-28. 

NOTICE, 

director's  meetings,  98. 

dividend,  form,  250. 

stockholders'  meetings,  136. 

waiver  of  notice  of  director's  meeting,  99. 


OATH, 

inspectors  of  election,  form,  248. 

OFFICERS, 

See  DIRECTORS. 

auditor,  powers  and  duties,  105. 

by-laws  violated  may  result  in  individual  liability,  86. 
counsel,  powers  and  duties  of,  104,  105. 
de  facto  powers  conferred  by  permission,  98. 
director's  liability  for  acts  of,  95. 
election  and  removal  by  directors,  96. 
election  by  stockholders,  96. 
number  and  classes  of  officers  in  corporation,  97. 
powers,  source  and  extent,  96,  97. 
president,  powers  and  duties,  100,  101. 
secretary,  powers  and  duties,  102. 
treasurer's  powers  and  duties,  103,  104. 
two  or  more  offices  held  by  same  person,  97. 
vice-president,  powers  and  duties,  101,  102. 

OPTION, 

underwriters'  option  on  stocks  and  bonds,  49. 

ORDER  OF  BUSINESS, 

stockholders'  meetings,  137. 

ORGANIZATION, 

where  to  incorporate,  22. 


348  INDEX. 

[References   are   to  pages."] 
OUTSTANDING  STOCK, 

definition  and  value,  118. 

OVER-ISSUED  STOCK, 
definition,  120. 
good  faith  purchaser's  rights,  121,  122. 

P 
PARLIAMENTARY  LAW, 

See  RULES  OF  ORDER. 
PARTNERSHIP, 

advantages  of  incorporation,  7. 

changing  to  corporation,  65-67. 

joint  stock  company  distinguished  from  corporaton,  4. 

may  own  corporation  stock,  14. 

promoters  may  be  liable  as  partners,  21. 

PAR  VALUE, 

shares  of  stock  should  sell  at,  35. 

PATENTS, 

value  when  exchanged  for  stock,  69. 

PAYMENT, 

stockholders'  liability  on  partly  paid  shares,  134. 

PORTO  RICO, 

advantages  and  disadvantages  of  corporation  laws,  27. 
POWERS, 

inherent  powers  of  corporation,  77. 

ultra  vires  acts,  77,  78. 

PREFERRED  STOCK, 

bonds  of  corporation  compared  with,  40-41. 

classification  as  to  dividends,  114. 

cumulative  dividends,  effect  of  issue,  41. 

definition,  113-116. 

distribution  of  assets  on  dissolution,  114. 

dividend  payments  controlled  by  articles  of  association,  65. 

form  for  certificate  and  stub,  230. 

issue  to  tructee  for  sale,  65. 

price  with  reference  to  time  of  issue,  62. 

redemption  by  corporation,  115,  116. 

right  to  issue,  116. 

voting  at  stockholders'  meetings,  137. 

voting  rights  of  holder,  116. 


INDEX.  349 

[References  are   to   pages.] 
PRESIDENT, 

directors'  meetings,  presides  at,  99. 
negotiable  instruments  executed  by,  101. 
powers  and  duties,  100,  101. 
stockholders'  meetings  called  to  order  by,  137. 

PRINCIPAL  AND  AGENT, 

directors  are  agents  of  corporation,  92. 

PROFIT, 

capitalization  fixed  on  basis  of,  34,  35. 
corporations  organized  for,  2. 

depreciation  and  renewals  charged  against,  152,  153. 
dividends  on  preferred  stock  payable  from,  114,  115, 
promoter  forming  a  corporation,  16. 
stockholders  may  share  in,  133. 

PROFIT  AND  LOSS, 

additions  to  property  charged  against  when,  155. 
auditor's  charges  against,  152. 

PROMISSORY  NOTES, 

bonds  of  corporation  likened  to,  39-44. 
marketing  in  open  market,  267. 

PROMOTER, 

accounting  for  secret  profits,  19. 

commission  for  forming  corporation,  18. 

contracts  of  corporation  made  by  promoter,  21. 

contract  of,  form,  193. 

corporation's  liability  for  services  of,  19. 

definition  and  functions  of,  15. 

determining  amount  of  capitalization,  32-39. 

directors  provided  for  new  corporation  must  be  independent, 

17. 

failure  to  organize  corporation,  19. 
fiduciary  relation,  15-17. 
fraud,  aiding  and  abetting,  22. 
fraud  and  concealment,  18. 
partnership  liability,  21. 
placing  stocks  and  bonds,  45,  49. 
profits  of  forming  corporation,  16. 
prospectus  disclosing  interest,  17. 
-  relation  of  promoters  among  themselves,  21. 
subscriptions  obtained  by  misrepresentation,  18. 
trustee  for  proposed  corporation,  17. 


350  INDEX. 

[References   are   to  pages.] 

PROSPECTUS, 

misrepresentations  contained  in,  18. 
promoter's  interest  disclosed  by,  17. 

PROXY, 

at  stockholders'  meetings,  attendance  by,  138. 
director  cannot  be  represented  by,  99. 
form  for  particular  meeting,  247. 
form  for  specific  action,  247. 
simple  form,  247. 

PUBLICATION, 

notice  of  stockholders'  meetings,  136. 

PUBLIC  UTILITY  CORPORATIONS, 
classification  of  corporations,  2. 

PURPOSES  OF  INCORPORATION, 

forms  of  purpose  clauses,  199  et  seq. 


QUORUM, 

directors'  meetings,  what  constitutes,  99. 
stockholders'  meeting  must  be  attended  by,  135. 


RAILROADS, 

bonds,  classification  of,  125-130. 
bond  issues,  value  determined  how,  128,  129. 
improvements,  bookkeeping  charges  for,  153-156. 
law  governing  corporations,  2. 

RATIFICATION, 

corporation  liable  for  unauthorized  acts,  95. 

RECEIVERSHIPS,  260. 

RECEIVER'S  CERTIFICATE, 
form,  241. 

REDEMPTION, 

bonds  subject  to  redemption,  130. 

preferred  stock  redeemed  by  corporation  when,  116. 

REGISTERED  BOND, 

definition  and  incidents,  129. 


INDEX.  351 

[References   are   to   pages.] 
REGISTRAR, 

good  faith  purchase  on  transfer  by  registrar,  121,  122. 
negligence,  liability  for,  122. 
securities  must  be  registered  when,  60. 
use,  powers  and  duties,  120-122. 

REMOVAL, 

directors  may  move  principal  office,  81. 

RENEWAL, 

charter,  effect  of  renewal,  190. 

charged  for  in  corporate  bookkeeping,  153. 

REORGANIZATION, 

dissolution  may  be  followed  by,  80. 
law  concerning,  188-190. 

REPEAL, 

dissolution  by  repeal  of  charter,  185. 

REPORTS, 

annual  reports  required  by  law,  23-27. 
auditor's  duty  concerning,  147,  148. 
auditor's  statement  of  condition,  151-168. 
president  makes  when,  101. 

RESERVE, 

providing  for  in  determining  amount  of  capital,  35. 

RESIDENT  AGENT, 

corporations  organized  to  do  business  in  other  states,  27. 

RESIGNATION, 

stockholder  cannot  withdraw  when,  185. 

ROCK  ISLAND, 

distribution  of  stocks  and  bonds,  47,  48. 

RULES  OP  ORDER, 

definition  and  use,  87. 

RULES  ON  SECURITIES, 

New  York  Stock  Exchange,  303. 

S 
SALARIES, 

counsel  for  corporation,  105. 
treasurer's  compensation,  104. 
president  receives  when,  100. 
vice-president  receives  when,  102. 


352  INDEX. 

[References   are   to  pages.] 
SALE, 

dissolution  effected  how,  186. 

good  faith  purchase  on  transfer  by  registrar,  121, 122. 

SCRIP, 

record  in  instalment  books,  178,  179. 

SEAL, 

corporation  may  have  and  use,  77. 
corporate,  270. 

SECRETARY, 

corporation  calendar  kept  by,  179-181. 

duties  in  transfer  of  stock  certificates,  124. 

elections,  duties  concerning,  138. 

minute  book,  should  keep,  168,  169. 

powers  and  duties,  102. 

stock  certificate  book,  duties  concerning,  173,  174. 

stockholders'  meetings,  duties  concerning,  136,  137. 

SECURITIES, 

bonds  classified,  125-130. 

definition,  50. 
SERVICES, 

promoter  may  recover  from  corporation,  19. 

stock  issued  in  payment  for,  23-27. 

value  when  exchanged  for  stock,  68,  69. 
SIGNATURES, 

corporate,  270. 
SINKING  FUND, 

redemption  of  bonds  provided  by,  43. 
SHARES  OF  STOCK, 

bonus  and  partly  paid  shares,  111,  112. 

distinguished  from  capital,  110. 

execution  and  levy  upon,  110. 

kinds  of  stock  defined,  113-120. 

liability  of  holder  if  sold  below  par,  111,  112. 

liability  of  holder  when  full  paid,  111. 

not  essential  to  ownership  of  capital,  110. 

personal  property  of  stockholders,  110. 

refusal  to  transfer  on  books,  174. 

stockholders'  liability  on  partially  paid  shares,  134. 

stockholders'  meetings,  136-139. 

subscription  book,  176-178. 

transfer,  cancellation  of  certificates,  173. 


INDEX.  353 

[References   are   to   pages.} 
SOUTH  DAKOTA, 

advantages  and  disadvantages  of  corporation  laws,  25. 

SPECIAL  LAWS, 

incorporation  by  special  act,  4. 

SPECIAL  MEETINGS, 

directors  may  hold,  99. 

SPECIAL  STOCK, 
definition,  117. 

STATEMENT, 

interpretation  by  accountant,  157-167. 

American  Bankers'  Association  standard  form  for  corporation, 
264. 

STOCK, 

See  INCREASE  OF  CAPITAL  STOCK;  SHABES  OF  STOCK. 
advantages  from  issue  of  corporation  stock,  6. 
bonds  distinguished  from,  40-41. 
bonus  and  watered  shares,  111,  112. 
capitalization  of  company,  32-39. 
common  stock  defined,  113. 
corporation  allowed  to  hold  when,  25,  26. 
distinguished  from  capital,  109. 
dividends  earned  before  stock  is  issued,  63. 
essential  in  corporations  for  profit,  110. 
full  paid  stock  defined,  111. 
income-yielding  capacity,  table,  320. 
kinds  of  stock  defined.  113-120. 
Hating  in  stock  exchanger^, 
nature  and  characteristics,  109,  110. 
partly  paid  stock  defined,  111. 

payment  of  subscriptions  before  beginning  business,  26. 
placing  by  promoters  and  agents,  45,  49. 
preferred  stock  defined,  113-116. 
price  with  reference  to  time  of  issue,  62,  65. 
registrars  and  transfer  agents,  120-122. 
sale  at  market  price  by  going  corporation,  112. 
secretary's  duties  concerning,  102. 
subscriptions  and  ownership,  14. 
subscription,  effect  of,  69,  70. 
treasurer's  duties  concerning,  103. 
MOD.  Bus.  CORP.— 23 


354  INDEX. 

[References   are   to   pages.] 

STOCK — Continued. 

valuation  of  property  received  in  exchange,  68,  69. 
value  determined  by  stock  exchange,  61,  62. 
void  when  over-issued,  120. 

STOCK  BROKERS, 
origin  of,  286. 

STOCK  CERTIFICATE, 

incidents  of  issue  and  transfer,  123-125. 

loss  or  destruction,  effect  of,  124. 

loss  or  theft  after  assignment  in  blank,  124,  125. 

negotiability,  124. 

origin  of,  283. 

registrar's  liability  on  void  certificate,  122. 

registrar  or  transfer  agent  signs  when,  121. 

stockholders'  rights  concerning,  134. 

STOCK  CERTIFICATE  BOOK, 

character  and  contents,  172-174. 
return  of  certificate,  173. 
transfers  entered  in,  174. 
transfer  of  shares,  173. 

STOCK  EXCHANGE, 

functions  and  declarations  of  purpose,  61. 
listing  stocks  and  bonds,  59. 
origin  of,  287. 

registry  of  securities  required,  60. 
rules  of  business,  59,  62. 

rules  on  admission  of  securities,  New  York  Stock  Exchange, 
303. 

STOCKHOLDERS, 

amendment  of  charter  cannot  be  made  by,  79-81. 

auditing  books  of  officers,  105. 

auditor  as  representative  of,  147,  148. 

by-laws  adopted  by,  84,  85. 

corporation  distinct  from,  1. 

directors  and  officers  chosen  by,  96. 

dissolution  of  corporation  effected  by,  185,  186. 

dividend  book  for  benefit  of,  176. 

ledger,  character  and  contents,  171,  172. 

list  kept  in  home  state,  28. 

meetings,  136-139. 

meetings,  duty  of  secretary,  102. 


INDEX.  355 

[References   are  to  pages.] 
STOCKHOLDERS— Continued. 

meetings  in  state  where  corporation  was  created,  27. 

meetings,  time,  place  and  purpose,  136-139. 

meetings,  where  held,  23-27. 

reorganization,  authority  for,  189. 

rights,  powers  and  liabilities,  133-135. 

transfer  of  shares,  123-125. 

unanimous  consent  to  change  of  charter  or  articles,  79. 

STOCKHOLDERS'  LEDGER, 

character  and  contents,  171,  172. 
transfers  entered  in,  174. 

STOCKHOLDERS'  MEETING, 

amendment  of  charter  or  articles,  81. 
calendar  recording  date  of,  179-181. 
certificate  of  officers,  169. 
dissolution  ordered  by,  186,  187. 
minority,  privileges  of,  138. 
minute  book  records,  168,  169. 
minutes  corrected  and  approved,  170. 
notice  of  annual,  form,  245. 
notice  of  special,  form,  245. 
notice  to  stockholders,  136. 
objections  entered  in  minutes,  170. 
order  of  business,  137. 
place  of  holding,  136. 
presiding  officer,  136,  137. 
proxies  voted  at,  138. 
proxy  for,  form,  247. 
regular  and  special  meetings,  64. 
special  meetings,  139. 
voting,  manner  of,  137. 
voting,  who  entitled  to  privilege,  137. 
waiver  of  notice,  form,  246. 

STOCK  SUBSCRIPTION, 

assessment,  definition  and  effect,  70,  71. 

STUBS, 

stock  certificate  book,  entries  in,  172,  173. 

SUBSCRIPTIONS, 

by  owners  of  business  in  agreement  with  promoter,  form,  194. 
effect  and  binding  force,  69-71. 
forfeiture  for  non-payment,  70. 


356  INDEX. 

[References   are   to   pages.] 
SUBSCRIPTIONS— Continued. 

instalment  books  recording  payments,  178,  179. 
promoter's  liability  for  misrepresentation,  18. 
stockholders  have  preference,  133. 
stockholder's  liability  upon,  134. 
subscription  book,  record  of,  176-178. 
underwriting  denned,  70. 
who  forbidden  to  form  corporations,  14. 

SUBSCRIPTION  BLANK, 

after  organization,  form,  196. 

SUBSCRIPTION  BOOK, 

character  and  contents,  176-178. 

SURETY  COMPANY, 

treasurer  should  give  bond  signed  by,  104. 

SYNDICATE,     • 

underwriting  corporation  securites,  46,  47. 

TABLES, 

income  from  stocks,  320. 
incorporation  fees,  316-317. 

TAXATION, 

bond  issue  treated  as  a  debt,  44. 

calendar  recording  date  for  payment,  179-181. 

statutes  for  organization  of  corporations,  23-27. 

TAXES, 

foreign  corporations  required  to  pay,  28-31. 
reduction  by  bond  issue,  44. 
table  of,  318-319. 

THEFT, 

estoppel  of  owner  of  shares  assigned  in  blank,  124,  125. 

THEORY, 

duty  of  state  in  creating  corporation,  7. 

TRANSFER, 

dissolution  of  corporation  effected  how,  185,  186. 
incidents  of  issue  and  transfer  of  stock,  123-125. 
refusal  to  act  until  court  has  ruled,  174. 
registrars  and  transfer  agents,  120-122. 
stock  certificate  book,  entries  in,  173. 


INDEX.  357 

[References   are   to   pages."} 
TRANSFER  BOOK, 

character  and  contents,  174-176. 

stock  certificate  book  as  substitute,  174. 

TRAVELING  SALESMAN, 

foreign  corporation,  representative  of,  29. 

TREASURER, 

bond  and  sureties,  103,  104. 
dividend  book  kept  by,  176. 
powers  and  duties,  103,  104. 

TREASURY  STOCK, 
definition,  119. 

TRESPASS, 

directors  personally  liable  when,  95. 

TRUSTS, 

organization  through  financial  banking,  50,  59. 
size  of,  278. 

TRUST  COMPANIES, 

fiscal  agents  in  placing  stocks  and  bonds,  45. 

stock  exchange  recommendations,  60. 

registrars  and  transfer  agents  for  corporations,  120-122. 

TRUST  DEED, 

trust  company  as  trustee,  60. 

TRUSTEE, 

issue  of  preferred  stock  for  sale,  65. 

TRUSTS  AND  VOTING  TRUSTS,  257. 

UNDERWRITING, 
definition,  46. 
form  of  agreement,  196. 

sales  of  stocks  and  bonds  through  underwriters,  48,  49. 
stock  subscription,  agreement  concerning,  70. 

UNINTELLIGENT  COMPETITION,  289. 

UNISSUED  STOCK, 
definition,  118. 

UNLISTED  SECURITIES, 

rules  of  admission,  N.  Y.  Exchange,  309. 


358  INDEX. 

[References   are   to   pages.] 
ULTRA  VIRES, 

definition  of  term,  77,  78. 
director's  personal  liability,  95. 

VALUE, 

property  exchanged  for  stock,  68,  69. 
stock  exchange  gives  publicity  to,  61,  62. 

VICE-PRESIDENT, 

powers  and  duties  of,  101,  102. 

VIRGINIA, 

advantages  and  disadvantages  of  corporation  laws,  26. 

VOTING, 

bondholders  allowed  to  vote  when,  26. 
preferred  stockholder's  right,  116. 
stockholders'  meetings,  136,  137. 
stockholders'  powers  concerning,  135-139. 

VOTING  TRUST,  257. 

agreement,  form,  243. 

WAIVER, 

notice  of  directors'  meeting  may  be  waived,  99. 

WALL  STREET, 

financial  banking  and  trust  organization,  50,  59. 

WASH  SALES, 

definition  of,  54. 

WEALTH, 

in  corporate  enterprise,  281. 

WEST  VIRGINIA, 

advantages  and  disadvantages  of  corporation  laws,  26. 

WINDING  UP  BUSINESS, 

directors  may  not  order,  95. 


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